Property owners are now considering transferring their properties to a limited company because of the recent changes in the tax rules by the government. There is now a restriction on tax relief on financing costs. This has an impact on all buy-to-let residential property owners who have finance costs. Since April 2017, you can see the effects of the implementation. Therefore, it is important to know how to transfer property to company without Stamp Duty Land Tax(SDLT). This guide will cover everything regarding transferring your properties into a limited company.
First, let’s discuss the definition of a limited company. Then, we can move on to the tax implications of transferring a property into a limited company. We will also explain the pros and cons of doing so.
What is a Limited Company in the UK?
When you hear the term limited company, you may think of it is as a company that has limitations and no freedom. Yet, that is not the case. ‘Limited liability’ means that your personal assets and liabilities remain separate from that of the business’.
If you want to set up a limited company, then you must know that it should have a unique name. No other business must have the same name. At the end of the name, you use Limited or Ltd. A limited company comes with its own advantages.
If things do not go well, then a limited company provides you with added protection and security. You are not responsible for any financial losses or liabilities that the business makes. It is limited to the amount you have put in the company.
Since a limited company has its own distinct entity status, it is gets loans and business investments easily. You, as an individual, will find it more difficult to do so. With the help of a limited company accountant, you can take full advantages of tax benefits.
What are the Methods of Holding Investment Property in the UK?
In the UK, there are various methods to hold a buy-to-let and residential property. Of course, each of them has their own advantages and disadvantages. These depends on your individual circumstances.
Nevertheless, there are three major ways to hold a buy-to-let property. They are as follows:
- In your own name.
- Through a trust.
- Through a limited company.
All three methods have different tax implications and liabilities.
Since the Section 24 interest relief restriction in April 2020, property owners can no longer reduce their bill by deducting any mortgage expenses from their rental income. It is not all bad news as there is now a tax-credit, which is 20% of mortgage interest payments. Undoubtedly, this is a significant incentive to transfer your property to a limited company.
Suppose there already exists a mortgage on your property. In that case, the mortgage lender will not allow you to move it into a limited company. Therefore, you need to communicate with your mortgage lender prior to transferring your property into a limited company.
If you transfer your current home within 3 years of buying home, then you pay 3% surcharge to HMRC. You can claim it back.
You are not responsible for the liabilities of the company as the owner of a limited company. This is because there is a legal separation between the business and individuals. No personal responsibility rests on your shoulders over any legal issues. In fact, you are not responsible for the actions of the fellow members of the company. Since you do not have to use your use own funds to pay off debt, there is more protection within a limited company. It limits your legal liability.
Inheritance Tax (IHT)
Your estate owns shares in the limited company, whose value reflects the value of the company’s properties for IHT purposes. Nevertheless, you can make IHT savings by having a limited company property business. You can do so through directors’ loan accounts or loans. Or you can set up a Family Investment Company. This can reduce the IHT exposure. As always, you should reach out for professional advice before going down this route.
What are the Advantages of Transferring Property to a Limited Company?
When trying to decide whether to transfer your property to a limited company, you should weigh the pros and cons. Following are the advantages of doing so:
You can deduct mortgage interest and allowable expenses from your rental income when you own properties through a limited company. This will reduce the amount of corporation tax you owe since it reduces the profit. Therefore, your tax bill is less. Therefore, you should know how to transfer property to company without Stamp Duty Land Tax(SDLT).
To reduce their tax bill, property owners cannot deduct mortgage expenses from their rental income any longer. Although, there is a tax-credit now. You can claim it for limited companies at 20% of mortgage interest payments.
Corporation Tax is Lower
As compared to personal income tax, corporation tax is lower. Depending on profits, the rate for corporation tax ranges from 19% to 25%. Whereas the rates for personal income tax are higher. For basic rate taxpayers it is 20%, it is 40% for higher rate taxpayers, and for additional rate taxpayers it stands at 45%.
Minimisation of Financial and Legal Liability
In case there are any legal issues or financial losses within the company, your liability for them will remain minimum. Unless you gave personal guarantees for borrowing.
Potentially, incorporation has IHT benefits. By using customised types of shares, you can get long-term IHT protection of future growth. This is for the value of the properties.
It is possible to qualify for incorporation relief. Also, you can benefit from the deferral of Capital Gains Tax.
You can retain funds after tax as reserves. Then, later you can reinvest them into properties. Through this, you can top up director pensions or pay them out as dividends.
Personal Tax Savings
There is also the benefit of personal tax savings. You can do so by undertaking tax efficient profit extraction from the limited company. This is in comparison with the personal tax you must pay as a sole trader.
Spouse Tax Benefits
To gain further tax advantages, you can add your spouse as a shareholder or non-executive director.
What are the Disadvantages of Transferring Property to a Limited Company?
You must know about the downsides of transferring your property into a limited company before taking such a step. Also, it is ideal to seek expert advice. Depending on the number of properties you own, the advantages can vary. However, there are some disadvantages that are certain. Thus, it is important to know how to transfer property to company without Stamp Duty Land Tax(SDLT).
Following are the drawbacks to transferring a property:
After you transfer your rental properties to a limited company, they are no longer yours. The ownership belongs to the company instead of you. Even though you own shares in the company, you cannot mortgage an asset that is not yours. Furthermore, your mortgage company can refuse to give a mortgage to a limited company.
The transfer process involves paying off the existing personal mortgages and taking out new commercial mortgages. Your mortgage company will probably request that you do this. Commercial mortgages are going to cost you more because of higher rates of interest. Therefore, your overall mortgage cost will increase.
Stamp Duty Land Tax (SDLT)
You will need to pay SDLT based on the open market value of your property when you transfer it. This is an initial financial outlay that you must factor in while transferring property into a limited company. Therefore, you should know how to transfer property to company without Stamp Duty Land Tax(SDLT).
When you run a limited company, then there are additional costs as well. For example, corporation tax returns and accountancy fees for preparing annual accounts. Yet, savings will probably outweigh these extra expenses.
|Personal tax savings||You do not have ownership|
|Corporation tax is lower than income tax||Higher mortgage costs|
|IHT benefits||Additional expenses|
Paying Stamp Duty Land Tax(SDLT) When Transferring Property to a Limited Company
Based on the property’s market value, you must pay Stamp Duty Land Tax when you transfer it to a limited company. It is not dependent on the amount of consideration.
Suppose the market value of a property is £500,000. Yet, the limited company pays £200,000 as a chargeable consideration.
In this case, the company must still pay Stamp Duty Land Tax(SDLT) on the market value of the property.
You must pay Stamp Duty Land Tax(SDLT) in two scenarios:
- When the individual who is transferring the property is has a connection to the company. For example, relatives.
- In case the company pays for the property by using its own shares. They can do so either entirely or partially. This rule still applies when the person transferring the property is somehow connected to the company. It does not matter if it is not the same company that is receiving the property.
Furthermore, you may end up paying a higher rate of SDLT if you buy additional residential properties. Thus, it is necessary to comprehend how to transfer property to company without Stamp Duty Land Tax(SDLT).
Can You Transfer Property to Company Without Stamp Duty Land Tax(SDLT)?
Unfortunately, you must incur stamp duty when transferring property to a limited company. However, you can still qualify for relief.
It is crucial to focus on certain factors if you want to make sure that you qualify for relief. They include the following:
- Your property business is a legitimate activity, and it generates income.
- You should involve yourself in tasks such as rent collection, tenant management, and property maintenance. Make sure that you remain active in the business.
If you comply with these conditions, then you are potentially eligible for incorporation relief. As a result, you are exempt from both Stamp Duty Land Tax and Capital Gains Tax.
Undoubtedly, this encourages property owners to transfer their property to a limited company.
How to Transfer Residential Property to Limited Company
Let’s move on to the subject of transferring residential property to a limited company without paying Stamp Duty Land Tax(SDLT).
This especially applies to those property owners who have more than three properties in their own name presently.
Before the tax law changes by George Osborn in 2017, most property owners bought properties as individuals. Now, the tax rates for property owners are higher.
Therefore, property owners prefer to transfer properties to a limited company to lower the amount of tax they owe.
There are several benefits of transferring properties to a limited company.
Not only is it a smooth way to transfer property to future generations, but it also enables tax savings.
Please note that you need expert guidance and advice to transfer residential properties to a limited company effectively.
How to Transfer Buy-to-Let to Limited Company
Now, the question arises: what about buy-to-lets?
Suppose you have less than ten buy-to-let properties for investment. Additionally, you are not running a property lettings business. In this scenario, transferring properties to a limited company is not ideal for you. This is because the costs of potential tax implications outweigh this transfer.
Whereas, if you do have a lettings business, then using a limited company for holding your properties is beneficial. Instead of income tax, you will pay corporation tax on profits.
For this tax year, a 25% main rate is chargeable.
In comparison to the higher rate (40%) and additional rate (45%) of personal income tax, corporation tax is significantly lower.
However, please note that income tax can still apply if you withdraw profits from the company. Thus, you must comprehend how to transfer property to company without Stamp Duty Land Tax(SDLT).
You must consider the following factors before you transfer buy-to-let properties to a limited company:
- There are tax implications on dividends that you take from the company.
- Limited companies are not eligible for entrepreneurs’ relief and incorporation relief.
- If you do not plan to manage a larger property portfolio or require income instantly, then setting up a limited company structure is appropriate.
Bear in mind that the optimal holding structure is according to your personal situation.
If you are not sure, then you should seek advice.
To conclude, it is a complex matter to transfer property to a limited company. You need expert advice before you can do so. Fortunately, it is possible to not incur Stamp Duty Land Tax(SDLT) when transferring your property to a limited company. However, do not forget to get guidance from professionals. Furthermore, you need to consider factors such as your personal circumstances, rental profits, long-term goals, and tax obligations. All these factors have an impact on your decision to transfer property into a company.