What You Need To Know About Transferring Property To A Limited Company

Property landlords will often be advised that holding property portfolios in a limited company is preferable to holding property in their own names. A limited company will invariably provide opportunity for tax efficient planning e.g. profit extraction and wealth protection. It must be stressed that a “one size fits all” approach can be risky and the use of a company for property landlords should be considered on a case by case basis. 

Where company ownership is considered the best option, landlords who already own property in their own names need to consider Capital Gains Tax (CGT) as well as SDLT as a cost of moving property to a company. In the case of CGT, the transfer of a property from an individual to a company will trigger a deemed disposal for CGT purposes. As the transaction will be between connected parties the disposal value will be treated as the open market value, (Section 18 TCGA 1992).

So for example a £100,000 gain (after annual exemptions) during the ownership period up to the transfer could result in £18,000 or £28,000 liability subject to which marginal rates of tax apply. 

There has been considerable interest seen around the availability of Incorporation Relief under Section 162 TCGA 1992. The effect of Section 162 , where the conditions are satisfied, is to roll over any gain into the base cost of shares in the company.  The conditions set out in Sec 162(1) are:

“A person transfers to a company a business as a going concern, together with the whole assets of the business, or together with the whole of those assets other than cash, and the business is transferred wholly or partly in exchange for shares issued by the company to the person transferring the business.”

These few lines have been advanced as the means to defer CGT on the transfer of a property to a limited company. The most important word in the legislation is “business”. Unfortunately, it is no longer possible to get an HMRC Clearance in advance of the transaction, as to whether the property is being transferred is a “business as a going concern”. Much reliance has been placed upon Elisabeth Moyne Ramsay Tax tribunal case, [2013] UKUT 0226 (TCC). Mrs Ramsay had inherited property in Belfast which consisted of ten flats. In 2004 the property was transferred to a company, TPQ, in exchange for shares in TPQ. The question before the Tribunal was whether the transfer satisfied the Sec 162 conditions and specifically was what was transferred to TPQ a business?

The decision on Sec 162 was found in Mrs Ramsay’s favour based upon criteria set out in the First  Tier Tribunal hearing. These were activities which Judge Berner said should be expected in a business:

Is there a serious undertaking earnestly pursued or a serious occupation

Is there an occupation or function actively pursued with reasonable or recognisable continuity

Is there a certain amount substance in terms of turnover

Are the activities conducted in a regular manner and on sound and recognised business principles.

Are they of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them.

The fact that Mrs Ramsay worked on the property for about 20 hours per week was a deciding factor in her winning the appeal. HMRC manuals contains the following advice for its staff:

CG65715 – Transfer of a business to a company: conditions for relief: meaning of ‘business’ – HMRC internal manual – GOV.UK (www.gov.uk)

 “You should accept that incorporation relief will be available where an individual spends 20 hours or more a week personally undertaking the sort of activities that are indicative of a business.”

Whilst there are those who are tempted to see the HMRC manual as “carte blanche” authority to secure Sec 162 relief, caution does need to be applied. We do see a flow of HMRC enquiries into the application of Sec 162, particularly in relation to templated planning. 

Prior to reliance on Sec 162 relief automatically applying, certain key facts need to be established, including:

• How many hours does the individual actually have available to fulfill the expected activities set out in the Ramsay case e.g. do they have a full time job which curtails their availability.
• In the event of a challenge what evidence could be produced to support the activities been carried out.

Based on our experience of Sec 162 we are able to provide an opinion as to the likelihood that the relief will apply or not,- to the transfer of property to a company in exchange for shares. Please contact us at 01902 711370 or email enquiries@uklandlordtax.co.uk if you would like to arrange a review of your circumstances in relation to Section 162 relief.

If you found this article to be informative then why not read our guide to sharia law mortgages or how the 2023 budget affects landlords?

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