Incorporation Relief & Partnership Relief: A Complete Guide
Understanding Incorporation Relief
What Is Incorporation Relief?
Incorporation Relief allows property investors to defer Capital Gains Tax (CGT) when transferring a property business into a limited company in exchange for shares. However, the business must be actively managed—passive rental income alone does not qualify.
Eligibility Criteria
To qualify for Incorporation Relief, you must:
✔ Run an active property business – This includes tenant management, maintenance, and marketing.
✔ Spend at least 20+ hours per week managing the business (as referenced in Ramsay v HMRC).
✔ Transfer the entire business – Including all properties, assets, and liabilities.
✔ Receive shares, not cash, in exchange for the business transfer.
Benefits of Incorporation Relief
📌 Defers CGT – No immediate tax bill, as the gain is rolled into the shares’ base cost.
📌 Mortgage Interest Relief – Companies can deduct full mortgage interest as a business expense.
📌 Succession Planning – Easier to transfer assets via shares.
📌 Reduced Future CGT – The company acquires the properties at market value, reducing future CGT exposure.
Understanding Partnership Relief
What Is Partnership Relief?
Partnership Relief can eliminate or significantly reduce SDLT when transferring properties from a genuine partnership into a limited company owned by the same partners in the same proportions.
Eligibility Criteria
Have a genuine partnership
With a formal partnership agreement, tax filings, and financial records.
Keep ownership proportions the same
The partners’ shares in the company must match their previous partnership shares.
Ensure no change in beneficial ownership
If ownership remains the same, SDLT does not apply.
Benefits of Partnership Relief
Eliminates or reduces SDLT
No SDLT on property transfers.
Simplifies incorporation
Seamless transition from partnership to company.
Retains ownership continuity
Keeps the same partners in control.
Mortgage Considerations
Does the Mortgage Affect Tax Relief?
🔹 Incorporation Relief – Mortgages do not impact eligibility, but lender approval is needed.
🔹 Partnership Relief – SDLT applies if a mortgage is transferred and ownership changes.
Options for Mortgage Transfers
1️⃣ Beneficial Interest Transfer (No Remortgage Required)
✔ Property title remains in personal names.
✔ A Declaration of Trust transfers the beneficial interest to the company.
✔ Avoids refinancing costs.
2️⃣ Full Legal Title Transfer (Requires Remortgage)
✔ The company legally owns the property and takes over the mortgage.
✔ New mortgage terms apply—often at higher rates.
How the Base Cost Rolls into Shares
When transferring properties into a limited company under Incorporation Relief, the capital gain is rolled into the base cost of the shares. This means no immediate CGT liability—tax is only due when:
✅ The company sells the properties in the future, OR
✅ The shareholder sells their shares.
Example: CGT Deferral & Savings
🔹 Emma owns a property business with three rental properties:
- Original purchase price: £500,000
- Current market value: £900,000
- Capital gain: £400,000
🔹 If she sells personally, she would pay CGT at 24%:
- £400,000 × 24% = £96,000 tax payable
🔹 If she incorporates using Incorporation Relief:
- No CGT payable immediately – The gain is deferred.
- The company acquires properties at market value (£900,000), reducing future CGT.
- If Emma sells shares later, she could qualify for Business Asset Disposal Relief (BADR), paying just 10% CGT instead of 24%.
🔹 Potential tax saving: £96,000 CGT deferred and potentially reduced further upon sale of shares.
Pros & Cons of Moving Property into a Limited Company
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✔ Lower tax rates – Corporation Tax (25%) vs. Income Tax (up to 45%).
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✔ Full mortgage interest relief – Unlike personal ownership.
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✔ Limited liability – Protects personal assets.
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✔ Easier succession planning – Ownership transferred via shares.
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✔ Tax-efficient profit retention – Allows reinvestment.
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🚩 Higher costs – Incorporation requires legal and accounting fees.
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🚩 Higher mortgage rates – Limited company mortgages often have higher interest rates.
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🚩 Tax on profit extraction – Dividends and salaries may incur personal tax.
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🚩 SDLT & CGT risks – If reliefs are not available, taxes may apply on transfer.
Step-by-Step Process to Incorporate
✅Step 1: Mortgage Lender Approval
✔ Confirm whether a beneficial interest transfer is possible or if a re-mortgage is required.
✅Step 2: Assess Eligibility for Reliefs
✔ Incorporation Relief – Verify active business status.
✔ Partnership Relief – Confirm legitimate partnership structure.
✅Step 3: Property Valuation
Obtain a professional valuation for CGT, SDLT, and accounting purposes.
✅Step 4: Draft Legal Agreements
✔ Sale & Purchase Agreement (SPA) – For Incorporation Relief.
✔ Transfer Agreement – For Partnership Relief.
✅Step 5: Register the Limited Company
✔ Incorporate the company with Companies House.
✔ Define share structure for tax flexibility.
✅Step 6: Complete Legal & Tax Filings
✔ Land Registry Transfers – TR1/AP1 forms.
✔ SDLT Return (if applicable).
✅Step 7: Submit Tax Returns
✔ SA108 – For CGT reporting.
✔ Corporation Tax (CT600) – For company accounts.
How COPA Can Help
At COPA Accounting, we specialise in helping property investors incorporate their businesses tax-efficiently.
💡 What we offer:
🔹 Incorporation & Partnership Relief Assessments
🔹 Tax Planning for CGT & SDLT savings
🔹 Liaison with solicitors & mortgage lenders
🔹 Company incorporation & share structuring
🔹 Ongoing compliance & tax filing support
📩 Want to discuss your incorporation strategy? Get in touch today!