Incorporation Relief & Partnership Relief: A Complete Guide

Jordan Cowsill

Introduction

For property investors looking to move their portfolio into a limited company, tax efficiency is a key concern. Two major tax reliefs—Incorporation Relief (Section 162 TCGA 1992) and Partnership Relief (Schedule 15 FA 2003)—can significantly reduce the Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) liabilities when transferring property ownership to a corporate structure.

This guide explores the key differences, benefits, eligibility criteria, and the step-by-step process for using these reliefs to incorporate a property business.

Understanding Incorporation Relief

What Is Incorporation Relief?

Incorporation Relief allows property investors to defer Capital Gains Tax when transferring a qualifying business into a limited company in exchange for shares. The key requirement is that the business being transferred must be an active property business, not just passive rental income.

Eligibility Criteria

To qualify for Incorporation Relief, the property activities must meet the following criteria:

Business Activity: The property must be actively managed as a business (e.g., tenant management, repairs, marketing). Merely holding property as an investment does not qualify.
Time Spent: HMRC typically expects at least 20+ hours per week of active involvement (as seen in Ramsay v HMRC).
Transfer of Whole Business: The entire property business, including assets and liabilities, must be transferred.
Consideration Received: The business must be exchanged for shares in the limited company, rather than cash.

Benefits of Incorporation Relief

Defers CGT: Capital Gains Tax is rolled over into the base cost of the shares in the company, meaning no immediate tax liability.
Mortgage Interest Relief: Corporate structures allow greater relief on mortgage interest compared to personal ownership.
Succession Planning: Share structures provide flexibility in passing down assets to family members.
CGT Reset: The company acquires the assets at market value, reducing future capital gains exposure.

Understanding Partnership Relief

What Is Partnership Relief?

Partnership Relief eliminates or significantly reduces Stamp Duty Land Tax (SDLT) liability when transferring properties from a genuine partnership into a limited company owned by the same partners in the same proportions.

Eligibility Criteria

To claim Partnership Relief, the following conditions must be met:

Genuine Partnership: The business must have been operated as a partnership, with supporting evidence such as a partnership agreement, accounts, and tax filings.
Ownership Consistency: The ownership proportions in the partnership must match the shareholding in the new company.
Change in Beneficial Ownership: SDLT is not payable if the transfer does not change the ultimate beneficial ownership of the properties.

Benefits of Partnership Relief

SDLT Savings: Eliminates or significantly reduces SDLT on property transfers.
Continuity of Ownership: Simplifies the transaction by ensuring that ownership structures remain unchanged.
Facilitates Incorporation: Allows seamless transition from partnership to corporate structure with minimal tax liabilities.

Mortgage Considerations

Does the Mortgage Affect Tax Relief?

For Incorporation Relief: Mortgages do not impact eligibility. However, lenders must approve the transfer.
For Partnership Relief: SDLT applies if a mortgage is transferred and ownership proportions change.
Mortgage as Consideration: If the company assumes liability for a mortgage, this is considered chargeable consideration for SDLT unless Partnership Relief applies.

Options for Mortgage Transfers

Beneficial Interest Transfer (No Remortgage)
- The legal title remains in personal names.
- A Declaration of Trust transfers the beneficial interest to the company.
- Mortgage remains unchanged, avoiding refinancing costs.
Full Legal Title Transfer (Preferred – Requires Remortgage)
- The company takes over the legal title and mortgage, which is preferred as it solidifies the transfer with proper documentation.
- New mortgage terms apply, typically with higher interest rates and fees.

How the Base Cost Rolls into Shares

When transferring properties into a limited company using Incorporation Relief, any capital gain is rolled into the base cost of the shares issued by the company. This means no immediate CGT liability, and tax is only paid when the shareholder disposes their shares.

Example Scenario: CGT Deferral and 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 Emma were to sell these properties personally, she would pay Capital Gains Tax (CGT) at 24% (higher rate for residential property).

CGT on £400,000 gain: £400,000 × 24% = £96,000 tax payable

However, by transferring the properties into a limited company using Incorporation Relief, Emma defers this tax, and instead:

No CGT is payable immediately – the £400,000 gain is deferred.
The company’s property base cost is £900,000, meaning if the company sells the properties, it will only pay Corporation Tax (currently 25%) on any gains above this market value.
Emma’s shares in the company have a base cost of £500,000, reflecting the original purchase cost of the properties.
If Emma sells her shares instead of the properties, CGT applies to the rolled-in gain (£400,000) plus any further appreciation in share value. However, if structured correctly, she may qualify for Business Asset Disposal Relief (BADR) at a reduced 14% CGT rate instead of the 24% property CGT rate.

Potential Tax Savings

If Emma sells the properties personally, she pays £96,000 in CGT immediately.
If the company sells the properties in the future at the same £900,000 value, no tax is payable because the base cost was reset to £900,000 upon incorporation, giving a £96,000 tax saving compared to selling personally.
If Emma later sells shares in the company instead of the properties, she could pay only 14% CGT on the gain instead of 24%, reducing her tax to £56,000 instead of £96,000, saving £40,000 in tax.

This strategy allows investors to defer tax liability and potentially pay a lower rate in the future, making incorporation a tax-efficient option for many landlords.

Pros and Cons of Moving Property into a Limited Company

Benefits of Incorporating a Property Business

Tax Efficiency – Companies benefit from lower corporation tax rates (currently 25%), compared to personal income tax rates which can be as high as 45%.
Full Mortgage Interest Relief – Unlike individuals who face restrictions on mortgage interest deductions, companies can deduct full mortgage interest as a business expense.
Limited Liability – A company structure separates business assets from personal assets, reducing financial risk.
Easier Succession Planning – Ownership can be transferred through shares, making inheritance and estate planning more flexible.
Retaining Profits for Growth – Companies can retain earnings without an immediate tax charge, enabling reinvestment into new properties.

Challenges of Holding Property in a Limited Company

Higher Costs – Incorporating involves legal, accounting, and administrative costs, including annual company filings.
Higher Mortgage Rates – Many lenders charge higher interest rates on company buy-to-let mortgages compared to personal mortgages.
Tax on Profit Extraction – Extracting profits via dividends or salary can lead to additional personal tax liabilities.
Potential SDLT & CGT Liabilities – If Incorporation Relief and Partnership Relief are unavailable, transferring property to a company may trigger SDLT and CGT liabilities.

When Is It Better to Keep Property in Your Personal Name?

While incorporating can offer tax advantages, personal ownership may be more suitable in the following cases:

Small Portfolio & Basic Rate Taxpayer – If you own one or two properties and pay 20% income tax, the benefits of incorporation may be minimal.
Reliance on Rental Income – Extracting money from a company incurs dividend or salary tax, whereas personal rental income is received directly.
High SDLT or CGT on Transfer – If SDLT or CGT liabilities are significant when transferring properties, incorporation may not be cost-effective.
No Plans for Growth – If you don’t intend to expand your portfolio, a company structure may add unnecessary costs and complexity.
Low Mortgage Interest Costs – One key reason for incorporating is full mortgage interest deductibility. If your mortgage costs are low, incorporation may provide little benefit.

The best approach depends on individual circumstances, tax position, and long-term investment goals. COPA Accounting can help assess the most efficient structure for your property business.

Step-by-Step Process

Step 1: Mortgage Lender Approval

Contact the lender to confirm whether they allow a beneficial interest transfer or if a full title transfer is required.

Step 2: Assess Eligibility for Reliefs

Conduct an Incorporation Relief Assessment (confirm active business status and qualifying activities).
Conduct a Partnership Relief Assessment (confirm partnership legitimacy and ownership proportions).

Step 3: Obtain Property Valuation

A professional valuation is required for CGT, SDLT, and accounting purposes.

Step 4: Draft Transfer Agreements

For Incorporation Relief: A Sale and Purchase Agreement (SPA) must document the exchange of assets for shares.
For Partnership Relief: A transfer agreement must confirm that ownership proportions remain unchanged.

Step 5: Incorporate the Limited Company

Register the company with Companies House.
Define the share structure (e.g., alphabet shares for tax flexibility).
Draft a Shareholders’ Agreement covering dividend policies and ownership rights.

Step 6: Finalise Legal Documentation

For Beneficial Interest Transfers: Prepare a Declaration of Trust.
For Legal Title Transfers: Submit TR1/AP1 forms to the Land Registry.
For SDLT Compliance: File SDLT return if applicable (unless Partnership Relief eliminates liability).

Step 7: Submit Tax Returns

Final SA800 (Partnership Tax Return): Declares cessation of the partnership.
Self-Assessment (SA108): Declares CGT and claims Incorporation Relief.
Corporation Tax (CT600): Ensures proper reporting of the property’s acquisition in the company’s accounts.

Example Scenario: Incorporation, Tax Savings, and SDLT Considerations

Note: This example scenario is different to the Emma example detailed earlier.

James and Sarah are property investors who own six rental properties through a genuine partnership. They actively manage the business, spending over 20 hours per week on tenant management, maintenance, and marketing.

Scenario Before Incorporation (Personal Ownership)

Original purchase price: £1,500,000
Current market value: £2,500,000
Capital gain: £1,000,000

If they were to sell these properties personally, they would pay Capital Gains Tax (CGT) at 24% (higher rate for residential property):

CGT on £1,000,000 gain: £1,000,000 × 24% = £240,000 tax payable

Additionally, if they transferred the properties to a limited company without Partnership Relief, Stamp Duty Land Tax (SDLT) would be due on the full market value under the current rates (May 2025), including a 5% surcharge for additional properties:

0% on the first £125,000: £0
2% on £125,000 (from £125,001 to £250,000): £2,500
5% on £675,000 (from £250,001 to £925,000): £33,750
10% on £575,000 (from £925,001 to £1,500,000): £57,000
12% on £1,000,000 (above £1,500,000): £120,000
Subtotal SDLT: £213,250
Plus 5% Surcharge: £125,000
Total SDLT: £338,250

Total Tax On Transfer With No Reliefs: £578,250

Scenario After Incorporation (Using Incorporation Relief & Partnership Relief)

By transferring the properties into a limited company using both Incorporation Relief and Partnership Relief:

No CGT is payable immediately – the £1,000,000 gain is deferred.
The company’s base cost for CGT purposes is reset to £2,500,000, meaning if the company sells the properties in the future at the same value, no additional tax is due.
No SDLT is payable – because Partnership Relief eliminates the £338,250 SDLT charge that would otherwise apply without relief.
If James and Sarah later sell shares in the company instead of the properties, CGT applies to the original deferred gain (£1,000,000) plus any further appreciation in share value. If structured correctly, they may qualify for Business Asset Disposal Relief (BADR) at a reduced 14% CGT rate instead of 24%, cutting their tax liability from £240,000 to £140,000, saving £100,000 in tax.

Summary of Tax Savings

If they sell the properties personally: £240,000 CGT payable immediately.
If they transfer without Partnership Relief: £338,250 SDLT payable.
If they incorporate with reliefs and later sell properties at £2,500,000: No tax payable (as the base cost is reset).
If they sell shares in the company later: CGT could be as low as £140,000 instead of £240,000.

Total Potential Tax Savings

£240,000 CGT deferred and reduced to £140,000 if shares are sold instead of properties, £338,250 SDLT eliminated using Partnership Relief Total tax saved: £438,250

By incorporating with both Incorporation Relief and Partnership Relief, James and Sarah defer their CGT liability, eliminate SDLT, and gain more control over long-term tax efficiency.

Disclaimer:
All tax rates and percentages mentioned in this guide are accurate as of May 2025, during the 2025/26 tax year. These rates may be subject to change in future tax years. Always consult with a tax professional or accountant for the most up-to-date information.

How COPA Can Help

At COPA Accounting, we specialise in guiding property investors through the process of incorporating their businesses while maximising tax efficiency. Our expert team handles:

Incorporation Relief & Partnership Relief Assessments to confirm eligibility.
Professional Tax Planning to ensure optimal structuring for CGT and SDLT savings.
Liaison with Solicitors & Mortgage Lenders to facilitate a smooth transition.
Company Incorporation & Share Structuring tailored to your financial goals.
Ongoing Compliance Support, including Corporation Tax filings and property business accounting.

With COPA, you can confidently transition to a limited company structure while ensuring full tax compliance and minimising liabilities.

Get in touch today to discuss your incorporation strategy with our specialists!