Can I transfer my rental property into a Limited Company to save some tax?

While there are some advantages of using a Limited Company to operate a rental portfolio (and we will come to these in a second), there are tax implications that usually make the transfer of property you already own to a Limited Company a costly exercise.  In our opinion, the tax that would be due on the transfer of a portfolio of 10 properties or less would outweigh any potential tax savings.  Here is why….

Capital Gains Tax

Capital Gains Tax arises when you sell a property.  When you transfer the property into a Limited Company, the transaction will be treatedin the same way it would if you sold it to a third party.

You will pay Capital Gains Tax on the gain that you make and in simple terms, the gain is the difference between the market value at the date of transfer and the price you paid for the property.  You can then deduct the cost of transferring (selling) the property and any costs that you incurred on the purchase such as legal fees.  Lastly, any improvements you have made to the property will also be deduced from the gain.

The calculation of Capital Gains Tax can become more complex if the property is owned by more than one person, has been inherited or been used as your primary residence during the period you have owned it and so we will not go into more detail here, your accountant will be able to calculate the tax for you and you can use this information to assess the benefits of transferring the property to a Limited Company.

The main thing to be aware of is that the gain will become chargeable on the day of completion, you have 60 days to report the tax due to HMRC and to make the payment.

Stamp duty

Stamp Duty Land Tax (SDLT) arises when you purchase a property.  Stamp duty will be payable by the company as it would on the purchase of any property.  The cost is deemed to be the market value.  Also, if the property is your second property, stamp duty will be 3% higher than usual.

Exemptions

If you are running a property business(known as a trade) as a partnershipthen you may be exempt from stamp duty.  Always seek advice before assuming that you are eligible for this exemption, it’s a very complex area and requires detailed planning.  As a general guide, you need to be able to demonstrate that you spend at least 20 hours a week working on your property business for it to be classed as a trade.

Advantages to using a Limited Company

Rental profits will be subject to Corporation Tax instead of the Income Tax you pay if you own the property personally.  Corporation Tax is currently 19% (due to change – this is for the 22/23 tax year) and Income Tax can be as high as 45%.

When you withdraw funds from the company, they will be taxed as dividends at either 8.75% or 33.75% depending on your other income (again, tax rates change each year).

Using a Limited Company will be preferable if you plan to leave the rental income in the company to be re-invested or withdrawn in years to come as the tax will be limited to Corporation Tax on the profit you make each year.

Other considerations

As always, tax will not be the only consideration when making a decision.  Here are some other things to think about:

• Early repayment charges – this may apply if your current mortgage is fixed for a set period of time
• Finance costs – choice of mortgage products tends to be more limited for Limited Companies and so you could find that interest rates and initial fees are higher.
• Accountancy fees – you will need to prepare accounts and a tax return for your Limited Company which will lead to higher accountancy fees
• Admin – all property transactions take time to deal with and you will need to spare time to deal with solicitors and advisors.

The best course of action will always be specific to your circumstances and future plans and so it’s highly recommended that you seek advice before entering into a property transaction. This blog relates to property you already own, the purchase of a new property has its own set of considerations.

We can work with you to devise a plan that best suits your needs and works for you in the short, medium and long term.  For more information, call us on 01322 250 001 or email info@adams-accountancy.co.uk.