Following changes to the taxation rules around residential rental properties, a large proportion of landlords have found themselves paying significantly more income tax than they previously were.
From 5th April 2020 landlords could no longer deduct finance costs (mortgage interest) from their property income on their Self-Assessment tax return. Instead, landlords now receive a basic rate deduction to their income tax liability. Effectively this means that rather than claiming 100% of the mortgage interest as a tax-deductible expense only 20% of the mortgage interest is claimed.
In the light of this many landlords have found themselves paying more income tax than they were in previous years. This particularly affects owners of large property portfolios where there is a large amount of mortgage interest payments. In the light of this many landlords are considering alternatives to holding rental properties in their personal names including holding the properties in a Limited Company.
However, we would strongly advise that before considering any options to transfer properties out of a landlord’s personal name; clear, professional advice needs to be sought from a competent, qualified tax adviser.
Transferring Property into a Limited Company
There are currently no proposals for the restrictions on mortgage interest which have been applied to individual landlords to be applied to Limited Companies, (also known as incorporated companies).
Setting up and running incorporated companies can be expensive and time-consuming and again it is something that needs to be discussed in detail with a qualified, reputable adviser.
For many the main deterrents to transferring property held in a personal property portfolio to a Limited Company is paying large one-off costs such as Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). Plus, the process of forming a Limited Company and transferring personally held property to it can be daunting, time-consuming and fraught with pitfalls if not done correctly.
A Potential Solution to the costs of Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) is Incorporation Relief.
Incorporation Relief
The process of transferring property owned by an individual landlord into a Limited Company is incorporation.
The implications of incorporation are multiple and include: –
- The individual disposes (sells) their entire property rental business at market value to the Limited Company and is liable for Capital Gains Tax.
- In exchange for the properties, the company will issue (give) shares to the individual
- The properties will need to be re-registered in the name of the Limited Company indicating the change of ownership of the properties.
- As the purchaser of the properties, the Limited Company is liable to pay Stamp Duty Land Tax (SDLT).
- There are currently no restrictions on the tax relief on finance costs, including mortgage interest, within the Limited Company.
- The Limited Company will pay Corporation Tax at 19% on the profits it makes.
- From 1st April 2023, the Corporation Tax percentages will be changed to: –
- Businesses with profits of £50,000 or less will remain at 19%.
- Businesses with profits between £50,001 and £250,000 will be taxed at a marginal (tapered ) rate of between 19% and 26.5% dependent on the profit made based on a formula set by HMRC.
- Businesses that earn profits of £250,001 or above will be taxed at 25% on the entirety of their profits.
- For the individual Shareholders of the Limited Company to earn income and extract profits from the property portfolio dividends would need to be declared from the profits made by the Limited company. There are separate rules on the taxation of dividends and these need to be discussed in detail with a qualified reputable professional.
- From 1st April 2023, the Corporation Tax percentages will be changed to: –
If a property business exists, Incorporation Relief may be available to use to offset the value of the gains from the sale of the properties against the cost of the shares exchanged for the properties in the newly incorporated company. However, the following terms must be met: –
A “Substantive” property business must exist. The term “Substantive” has no legislative definition, but case law provides guidance on this and to qualify there must be a reasonable amount of time spent on property-related activities.
Multiple Dwellings Relief
In the majority of cases, Stamp Duty Land Tax will be payable by the Limited Company based on the market value of the properties at the time of incorporation.
It may be possible to reduce the Stamp Duty Land Tax via a Multiple Dwellings Relief (MDR) claim.
Multiple Dwellings Relief applies to the purchase of two or more dwellings in a single or linked series of transactions. A Multiple Dwellings Relief Claim enables Stamp Duty Land Tax to be calculated based on the average value of the dwellings.
Before Incorporating a Property Portfolio into a Limited Company
Whilst saving tax is a key factor to consider when incorporating a property portfolio there are other important factors that also need to be considered. These include but are not limited to: –
- Discuss at the earliest opportunity with the mortgage providers your plans to incorporate the property portfolio. Fees may be applied by the lenders and the lender may not match any current favourable mortgage terms.
- There will be one-off fees payable for transferring the titles (ownership) of the properties to the Limited Company.
- Because the properties have to be transferred to Market Value to the Limited Company it is advisable to obtain a professional valuation for the properties by an independent valuer. This will mean one-off valuation fees will be applied.
- Importantly take into account your other taxable income, your personal and financial circumstances and plan ahead for the future.
Seek Advice – We are here to help
Before incorporating a property portfolio or making any business plan that will have long-term consequences, we would strongly advise seeking advice from competent, professional, qualified advisors such as ourselves who will be able to talk you through all the options available and help you plan for the long term looking at your whole tax and financial situation.
If you would like to discuss the options which are available to you, please do not hesitate to contact us and we will be glad to listen, advise and assist.