Considering transferring your property into a limited company can be a strategic move for many landlords and property investors. This blog will guide you through the process, highlight the benefits, and point out key considerations to watch out for.
What Does It Mean to Move Property into a Limited Company?
Transferring property ownership from an individual to a limited company means that the company will hold the property, and you will own shares in the company. This structure can offer significant tax advantages but also comes with administrative and financial considerations.
How to Transfer Property to a Limited Company
Using Incorporation Relief and Holdover Relief
- Incorporation Relief
Incorporation Relief allows you to defer the Capital Gains Tax (CGT) that would normally arise when you transfer your property to a limited company. To qualify for this relief:
- The property must be used as part of a business.
- The transfer must be for shares in the company.
When you transfer the property to the company, the gain is not taxed immediately. Instead, the gain is deducted from the base cost of the shares you receive in return. This means that CGT is effectively deferred until you dispose of the shares.
Example: John owns a rental property worth £500,000 with an original purchase price of £300,000. He transfers the property to his new company, which issues him shares worth £500,000. The £200,000 gain is deferred and reduces the base cost of his shares, so if he later sells the shares, the deferred gain is taken into account.
- Holdover Relief
Holdover Relief can be used when gifting property into a limited company. This relief allows you to defer the CGT until the company disposes of the property. This is particularly useful when no cash changes hands.
To qualify for Holdover Relief:
- The property must be transferred as a gift or for less than market value.
- Both parties (the individual and the company) must jointly claim the relief.
The gain is held over and deducted from the base cost of the property for the company, meaning CGT is deferred until the company sells the property.
Example: Jane gifts her rental property, worth £400,000, to her newly formed company. The original purchase price was £250,000, so there’s a potential gain of £150,000. By using Holdover Relief, this gain is deferred, and the company will recognize this gain when it eventually sells the property.
Benefits of Moving Property into a Limited Company
- Tax Efficiency
One of the primary benefits is the potential for tax savings. Rental income earned by a limited company is subject to corporation tax, which is typically lower than personal income tax rates.
- Mortgage Interest Relief
Companies can deduct the full amount of mortgage interest from their rental income, whereas individual landlords face restrictions.
- Profit Retention
Profits can be retained within the company, allowing for reinvestment in additional properties or other investments, thus deferring personal tax liabilities.
- Succession Planning
Transferring ownership of a company is easier and more tax-efficient than transferring property directly, making it a practical choice for succession planning.
What to Watch Out For:
- Initial Costs
The process of transferring property into a limited company can be costly, involving SDLT, CGT, and professional fees. It’s crucial to calculate these costs to ensure the transfer is financially viable.
- Administrative Burden
Operating through a limited company involves additional administrative tasks, including annual accounts, corporation tax returns, and company records.
- Financing
Mortgage lenders may have stricter criteria for lending to limited companies, and interest rates may be higher than for individual borrowers. Ensure you can secure suitable financing for the company.
- Dividend Tax
When you withdraw profits from the company as dividends, they are subject to dividend tax. Plan your withdrawals to minimize tax liabilities.
Example Scenario
Case Study: John, a landlord, owns a rental property valued at £300,000 with a mortgage of £150,000. He decides to transfer the property to a newly formed limited company to benefit from tax efficiencies.
- Valuation: The property is valued at £300,000.
- SDLT: John’s company pays SDLT on £300,000.
- Incorporation Relief: John uses Incorporation Relief to defer CGT on the transfer.
- Director’s Loan: The company takes a mortgage and pays John, creating a director’s loan account for the balance.
Conclusion
Moving property into a limited company can offer significant benefits, particularly in terms of tax efficiency and succession planning. However, it’s essential to consider the initial costs, ongoing administrative responsibilities, and potential financing challenges. Consulting with professional advisors and carefully planning the transfer can help maximize the benefits and ensure a smooth transition.