When an individual first lets out property, they rarely consider how best to structure the ownership. Then some years down the line when their property portfolio has expanded such that their income is pushed into the higher or additional rate bands, they begin to wonder whether they are operating their portfolio efficiently. At this stage many people think about incorporating but with Capital Gains Tax (‘CGT’) and Stamp Duty Land Tax (‘SDLT’) likely to be immediately chargeable it’s worth thinking about at the outset.
There is no ‘one size fits all’ – it will be a balance of income levels, borrowing, intention to expand the business and/or pass on wealth to future generations, involve family members in the business etc. Just because it can be done, does not mean it should be done. A reputable adviser will understand this.
If you personally own a property portfolio and are thinking about incorporating we would urge you to continue reading.
What does it mean to incorporate a property portfolio?
If a private landlord transfers their ownership of properties to their incorporated company then they have done what is known as ‘incorporating their property portfolio’. The transfers will take place either in exchange for newly issued shares in the company, cash, or a loan. From that date the individual will cease to receive rental income, instead the company will. The transfer will ordinarily give rise to CGT payable by the individual and SDLT payable by the company.
Advantages of incorporating your property portfolio
First and foremost, companies currently pay tax on profits at 19% – though this is set to increase to 25% from 1 April 2023. Individuals pay tax on their rental income between 20% and 45%. Even after the increase in 2023, the difference is potentially significant. This leaves more funds to do any of the following: repay outstanding debt secured against the portfolio, invest in renovating current properties and/or acquire new property.
In addition, companies are able to claim 100% of the finance costs on property (i.e. mortgage interest). As of April 2020, this is no longer available to individuals who are instead given relief by way of a basic rate (20%) tax reducer. Considering that finance costs often constitute a major expense for property holders, the ability to utilise the full expense as a deduction is a significant tax saver for companies.
Capital Gains Tax
The transfer of property to another person or company will typically give rise to a chargeable gain. Where the transferor is connected to the transferee (such as a company of which they are a shareholder) , CGT will be calculated with reference to the market value of the property regardless of how much is actually paid. Transfers to companies are often done in exchange for shares or a loan in which case the transferor has no cash proceeds with which to pay the CGT.
Stamp Duty Land Tax
SDLT is payable by the transferee on the purchase of land and buildings and companies pay the higher rate of SDLT (3% surcharge). Where the transferee and transferor are connected for SDLT purposes (a company and its shareholder are connected) consideration is taken to be the market value of the property instead of actual consideration given.
Subject to certain conditions being met, there may be some relief from the tax burden of transferring property to a company.
Incorporation relief reduces the chargeable gain to nil by effectively rolling the gain into the base cost of newly acquired shares. Incorporation relief is only available where all trade and assets of the business (except cash) are transferred to the company in exchange for shares, so where there is any cash consideration the relief will not be available.
Problematically, income from renting property is generally considered passive income and would not constitute a ‘business’. However, the recent case of Ramsay v HMRC  determined that it is the quantity of the activity, rather than just the quality, that is important in identifying a the existence of a business.
Relief from SDLT is available where a partnership incorporates. The rules are complex, but they aim to reduce the chargeable consideration to nil where the beneficial ownership proportion of the assets has not changed. To make use of the relief, it is vital that a partnership is established and that is has been operating for a reasonable period of time. There is anti-avoidance to prevent the creation of a partnership solely to reduce a tax bill. It is essential that a true partnership exists – the mere assertion that it does is not adequate.
Where there is no partnership, and two or more properties are being transferred between the same transferor and transferee, Multiple Dwellings Relief (MDR) can be claimed which may significantly reduce the SDLT payable. Where six or more properties are transferred, the company can elect to apply the non-residential rates of SDLT (but forgo a MDR claim).
Should you incorporate your property portfolio?
The choice of whether to incorporate is entirely based on one’s circumstances and objectives. For those looking to grow their property portfolio, the finance costs reliefs available to companies make it an attractive option. A company also operates as a solid vessel for transferring ownership of the properties to one’s children. If it’s for income tax reasons, a thorough analysis of the individual’s financial position might be required to determine if it would indeed generate any savings. Incorporating a property portfolio is not simple and each person’s case is different.
The explanation provided here is not meant to be advice for or against incorporating. If you are thinking about incorporating, you should contact an experienced adviser that will help determine what your best course of action is.
If you would like to discuss your property business and gain advice on how best to structure it contact the team today
If you are looking at property portfolios it would be worth reading ‘The three little pigs, a wolf, and some property tax’
For up to date tax tips keep an eye on our socials Facebook Instagram and LinkedIn