Considerations For Transferring Property To A Limited Company

We are often approached by clients wishing to explore transferring rental properties to an existing limited company. Typically, there will already be an existing personal service company through which a trade or business is operated e.g. IT Consultancy. Having established that there may be advantages to operating the rental property through a limited company a landlord can view the existing company as a convenient and immediate route to achieve tax savings. As we will set out below there are advantages and disadvantages to this strategy.

Since 2017, with the introduction of a restriction of relief for interest paid on mortgages, many landlords have been drawn to using a limited company to hold residential let property. Other than for furnished holiday lettings, landlords holding property in their own names now only receive a deduction of 20% of the interest paid. So interest paid of £1,000 on a residential mortgage would result in tax relief of £200 whereas prior to the change in 2017 higher rate taxpayers would have benefited from the relief of £400 or £450, subject to which tax band applied. When the legislation was introduced in the 2015 Finance Act, the projected economic impact on landlords up to 2021 was forecast at £1.3bn.

www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords 

Clearly, this sort of tax take will motivate landlords to explore their options!

Whilst the changes in interest relief have to an extent been factored into the property market, loss of income tax relief on interest paid continues to be an incentive to transfer property into a limited company.

It must be stressed that where there is an existing mortgage on a property it cannot be assumed that a lender will allow the property to be moved into a limited company or allow for the property to be moved into the company’s name. Any landlord contemplating such a move must first fully explore the terms of their mortgage and speak to their lender.

With Corporation Tax rates starting at 19% for profits up to £50,000 (from April 2023), there continue to be tax savings for landlords who retain profits within a company and carefully manage extracting salary and dividends within the basic rate band. This is particularly in point with the potential for 40% and 45% higher rate tax for individuals holding property, irrespective of whether profits are drawn or not.

We must now consider the clear downsides and matters to address, prior to transferring let property into an existing company:

• Do the existing company’s articles allow it to hold let property and do the SIC codes accurately reflect its revised activity?
• Has the potential CGT cost of the transfer been considered as the property will be deemed to have “sold” to the company at its market value? 
• Has the potential SDLT on the transfer to the company been considered? For let residential properties this will carry an additional 3% surcharge in addition to the normal rates.
• Has the potential effect on Business Asset Disposal Relief up to £1M of gains been considered? Transferring let property into a trading company could affect the availability of the relief particularly if the letting activity exceeds 20% of Revenue.
• Has IHT been fully considered i.e. is holding property within a trading company the most efficient and flexible way to plan and mitigate IHT exposure?

Proper consideration of the five bullet points above will be sufficient to deter the use of an existing trading company to hold let property. Inevitably a new company will be the best option. This new company should be set up correctly regarding ownership and share classes. This new company can provide an opportunity to transfer existing let property. Prior to completing the transfer of a property, a detailed review of the CGT and SDLT exposures will be essential. If IHT is a concern, we can work with clients to set up a Family Investment Company which works to pass on wealth to the next generation in an efficient manner.

If you need more information on this subject then get in touch at 0800 907 8633, via tax@fixedfeetr.com or via our online contact form to speak to one of our specialist tax advisors.

If you found this article informative then why not read our news around the buy-to-let income tax next?

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG