In this excerpt from the popular report ‘Property Company V Property Trust’, Sarah Bradford looks at whether it is beneficial to incorporate your property business.
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Landlords with existing property portfolios may wonder whether it may be beneficial to incorporate their business to escape the interest rate restriction and to benefit from the lower rates of corporation tax. However, this will have a number of tax consequences.
Stamp duty land tax (SDLT)
One of the main disadvantages of incorporating an existing property business is that SDLT has to be paid again.
Where the property is to be used as a property rental business, the 17% corporate rate of SDLT, applying to residential properties costing more than £500,000 which are bought by a company, does not apply. Instead, SDLT is chargeable at the residential rates applying to individuals and subject to the 5% surcharge. However, the 17% corporate rate will apply if a home is simply held in the company.
Where a property is transferred to a connected company (as would be the case where a landlord transfers a property to a company and some or all of the consideration is in shares), the chargeable consideration for SDLT purposes is the market value of the property at the time that it was transferred.
If the properties have increased significantly in value since they were acquired by the landlord, the SDLT on transferring them to a limited company may be significantly more than the SDLT paid when the properties were originally acquired.
The SDLT rates payable by a company on the acquisition of a residential property used in a property rental business (inclusive of the 5% surcharge) are set out below. The 5% surcharge does not apply where the consideration is less than £40,000 and, where this is the case, no SDLT is payable.
The rates shown in the table below apply from 1 April 2025.
|
Chargeable consideration |
SDLT rate |
|
Up to £125,000 |
5% |
|
The next £125,000 (£125,001 to £250,000) |
7% |
|
The next £675,000 (£250,001 to £925,000) |
10% |
|
The next £575,000 (£925,001 to £1.5m) |
15% |
|
The remaining amount (over £1.5m) |
17% |
SDLT on commercial properties is payable at the lower commercial rates.
Capital gains tax
When an individual transfers (or sells) an existing rental or investment property to the property company, there is a disposal for capital gains tax purposes. As the disposal is to a connected company, it is deemed to be made at market value.
However, incorporation relief may be available which will enable the individual to defer the associated capital gain until they dispose of their shares in the property company.
Incorporation relief is available where a sole trader or partner in a business partnership transfers their business and all its assets (or all its assets except for cash) to a limited company in exchange for shares in that company.
The relief is given automatically – it does not have to be claimed.
The effect of the relief is to reduce the base cost of the shares by the capital gain on the property when it was transferred to the company. So, if a landlord transfers property to a limited company in exchange for shares valued at £500,000 and realises a gain of £200,000 in doing so, the base cost of the shares is reduced by the held-over gain of £200,000 to £300,000. The gain does not crystallise until the shares are sold.
If the consideration is partly in shares and partly in cash, incorporation relief only applies to that part of the consideration received in shares. The gain relating to consideration received in cash is immediately chargeable. So, if a landlord transfers property valued at £500,000 to a limited company in exchange for shares worth £400,000 and cash of £100,000, realising a gain of £100,000 in the process, 80% of the gain (£80,000) benefits from incorporation relief, reducing the base cost of the shares to £320,000. The remaining 20% of the gain (£20,000) is immediately chargeable to capital gains tax. However, this may be sheltered by the annual exempt amount, where this is available.
It should be noted that incorporation relief will not always be beneficial – there is no point in deferring a gain on which no capital gains tax is payable, either because it is sheltered by the annual exempt amount or offset by allowable losses. As the relief is given automatically, if the individual does not wish it to apply, it must be disclaimed.
An election to disapply the relief must be made by the second anniversary of 31 January following the end of the tax year in which the transfer of the business took place (so, for an incorporation in 2025/26 by 31 January 2029).
Each person has their own entitlement to incorporation relief and can elect for it not to apply regardless of the action taken by other shareholders where a property which is jointly owned is transferred to the property company.
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Example |
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Maud has a residential rental property valued at £400,000. She decides that it would be beneficial to run her property business through a limited company. She sets up a limited company and transfers the property to the company in exchange for shares in the company, which are valued at £400,000. The property was purchased for £250,000. Costs of acquisition and sale are £20,000. The company must pay SDLT on the acquisition of the property. The chargeable consideration is £400,000. SDLT of £30,000 ((£125,000 @ 5%) + (£125,000 @ 7%) + (£150,000 @ 10%)) will be payable by the company. Maud makes a gain of £130,000 on the transfer of the property to the company (£400,000 – £250,000 – £20,000). As shares in the company are received in exchange, incorporation relief will apply automatically. The gain of £130,000 is held over, reducing the base cost of the shares to £270,000 (£400,000 – £130,000). As Maud has already used her annual exempt amount and has no allowable losses to set against the gain, she does not make a claim to disapply the relief. |
Operating through a property company from the outset
A new landlord may decide to operate their rental business via a property company from the outset, setting up the company and buying properties in the company name rather than personally. If finance is needed, the company will need to borrow the money rather than the individual.
SDLT on the purchase of the property
Where the company purchases the rental property, SDLT will be payable on the consideration, which in this case will be the purchase price rather than market value (as is the case where an individual transfers a property to the company in exchange for shares). SDLT (or, as appropriate, LBTT or LTT where the property is in Scotland or Wales) will be payable at the higher residential rate inclusive of the supplement, even if the company only owns one property.
