As a property owner or landlord, consider transferring your residential property into a limited company structure. This decision can have significant tax implications and requires careful planning. Our comprehensive guide, written by experts in the field, will walk you through the process of transferring property to a limited company, discussing the key considerations, tax implications, advantages, disadvantages, and practical aspects involved.

Understanding the Process of Transferring Property to a Limited Company

The process of transferring a property to a limited company involves changing the ownership from individual ownership to a company structure. Essentially, you are selling the property to the company, making the company the new legal owner. It’s important to note that this transfer is considered a disposal and new purchase, which can trigger various tax liabilities, such as Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).

To begin the process, you’ll need to set up a limited company if you still need to do so. Seek professional tax and legal advice to ensure that transferring your property to a limited company is the right move for your specific financial situation and to avoid potential pitfalls. Once you have decided to proceed, appoint a conveyancing solicitor to handle the legal aspects of the transfer process.

If you have an existing mortgage on the property, you’ll need to inform your lender of your intention to transfer the property to a limited company. In most cases, you’ll need to apply for a new mortgage under the limited company’s name, as the lender will treat this as a new transaction. Be aware that mortgage rates for limited companies are typically around 1% higher than standard residential mortgage rates.

To finalise the transfer, you’ll need to complete the necessary legal paperwork, which your conveyancing solicitor will assist with. This will include paying any applicable taxes, such as SDLT and CGT, which we’ll discuss in more detail later.

Tax Implications of Transferring Property to a Limited Company

Capital Gains Tax (CGT): When transferring a property to a limited company, you may be liable for Capital Gains Tax (CGT). CGT is calculated based on the difference between the original purchase price of the property and its market value at the time of transfer. For residential properties, CGT rates are 18% for basic rate taxpayers and 28% for higher rate taxpayers. It’s important to note that the reduced rates of 10% and 20%, which are typically available for other assets, do not apply to UK residential property.

However, there is some relief available under incorporation relief, as outlined in Section 162 of the Taxation of Chargeable Gains Act 1992. This relief allows for holdover relief on gains made during the incorporation process, effectively deferring the CGT liability. However, this relief has its limitations, particularly if the transfer involves any cash consideration or non-business assets.

It’s also worth noting that Business Asset Disposal Relief (BADR) and Section 165 Holdover (Gift) Relief are not applicable for the incorporation of ordinary rental properties.

Corporation Tax: As of April 2023, there have been changes to the Corporation Tax rates in the UK:

• Companies with profits below £50,000 now pay tax at 19%, which is known as the Small Profits Rate (SPR)
• Companies with profits between £50,000 and £250,000 benefit from marginal relief at a 25% tax rate
• The Small Profits Rate does not apply to Close Investment Holding Companies

One of the main advantages of transferring property to a limited company is the potential for lower tax rates. Corporation Tax rates are generally lower than personal income tax rates, which can result in significant tax savings for landlords. However, it’s essential to keep in mind that the government will report any further changes to Corporation Tax rates, so it’s crucial to stay informed and consult with a tax professional to understand how these changes may impact your specific situation.

Stamp Duty Land Tax (SDLT): Stamp Duty Land Tax (SDLT) is another important consideration when transferring property to a limited company. Under standard SDLT rules, tax is due on property transfers to a company if the market value exceeds the residential property SDLT threshold. For companies, an additional 3% SDLT surcharge, calculated based on the market value, applies to all property purchases. This surcharge applies even for transactions involving shares.

However, if the property business was operated as a partnership prior to incorporation, there may be some relief available under the ‘sum of the lower proportions’ rule. This rule allows for a reduction in SDLT based on the partnership structure. It’s important to note, though, that simply jointly owning a property does not constitute a valid partnership for these purposes. The partnership must have been operating as a genuine business for this relief to apply.

Benefits of Transferring Property to a Limited Company

Potential Tax Advantages: One of the primary benefits of transferring property to a limited company is the potential for tax advantages. As mentioned earlier, corporation tax rates are generally lower than personal income tax rates. By holding your property within a limited company structure, you can benefit from these lower tax rates on your rental income. Additionally, you can take advantage of various tax deductions and allowances available to limited companies, such as mortgage interest relief.

Limited Liability Protection: Another significant advantage of transferring property to a limited company is the limited liability protection it provides. When you hold property as an individual, your personal assets are at risk if something goes wrong with the property, such as a tenant suing you or the property being subject to a legal dispute. However, by holding the property within a limited company, you can protect your personal assets from any liabilities associated with the property. The limited company is treated as a separate legal entity, and any liabilities are limited to the assets within the company.

Easier Succession Planning: Transferring property to a limited company can also make succession planning easier. If you hold the property as an individual, transferring ownership to your heirs can be a complex and costly process, potentially involving inheritance tax. However, by holding the property within a limited company, you can transfer the shares of the company to your heirs, which can be a more straightforward and tax-efficient process.

Potential Inheritance Tax Mitigation: Holding property within a limited company may also offer potential inheritance tax mitigation. When you hold property as an individual, the value of the property is included in your estate for inheritance tax purposes. However, by holding the property within a limited company, you can structure your estate in a way that reduces your inheritance tax liability. This is a complex area of tax planning, and it’s essential to seek professional advice to understand how this may apply to your specific situation.

Risks and Disadvantages of Transferring Property to a Limited Company

Increased Costs: One of the main disadvantages of transferring property to a limited company is the increased costs involved. The process of transferring property to a limited company, also known as incorporation, can involve significant legal and accountancy fees. You’ll need to engage the services of a solicitor and an accountant to handle the legal and tax aspects of the transfer, which can add up to a substantial amount.

Additionally, mortgage rates for limited companies are typically higher than residential mortgage rates for individuals. Lenders often view lending to limited companies as a higher risk, and as a result, they may charge higher interest rates or require larger deposits. This can increase your overall borrowing costs and impact your profitability.

Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) Liabilities: Another potential disadvantage of transferring property to a limited company is the CGT and SDLT liabilities that may arise. As discussed earlier, when you transfer a property to a limited company, you may be liable for CGT on any gains made since the original purchase. This can be a significant amount, particularly if the property has increased in value substantially since you bought it.

Additionally, the transfer of property to a limited company is subject to SDLT, which is based on the property’s market value. There is also an additional 3% SDLT surcharge for properties transferred to limited companies, which can further increase the tax liability.

Restrictions on Financing Options: Transferring property to a limited company can also restrict your financing options. Some lenders may be reluctant to lend to limited companies, particularly if the company is newly formed or has a limited trading history. This can make it more difficult to secure financing for your property, or you may have to pay higher interest rates and fees to access funding.

Potential Tax Traps: There are also several potential tax traps to be aware of when transferring property to a limited company. For example, if you transfer a property to a limited company and then sell the property within three years, you may be liable for income tax on the sale proceeds rather than CGT. This is known as the “transactions in land” rule and can result in a higher tax liability than if you had sold the property as an individual.

Additionally, if you transfer a property to a limited company and then rent the property back to yourself or a family member, you may be subject to the “rent-a-room” rules, which can limit the amount of rental income you can receive tax-free.

Practical Considerations When Transferring Property to a Limited Company

Updating Lease Agreements: When transferring property to a limited company, it’s essential to update any existing lease agreements to reflect the change in ownership. The limited company will become the new landlord, and tenants will need to be informed of this change. You’ll need to obtain the consent of any existing tenants and provide them with the necessary documentation to reflect the change in ownership.

If tenants currently occupy the property, you’ll need to consider the impact of the transfer on their tenancy agreements. In most cases, the tenancy agreement will need to be updated to reflect the limited company as the new landlord. You may also need to provide the tenants with new contact details for the limited company and ensure that any deposit protection arrangements are updated.

Refinancing Existing Mortgages: If you have an existing mortgage on the property, you’ll need to consider the impact of transferring the property to a limited company on your mortgage arrangements. In most cases, you’ll need to refinance the mortgage under the limited company’s name, as the lender will treat this as a new transaction.

Refinancing a mortgage can be a complex process, and you may need to engage the services of a mortgage broker to help you find the best deal. You’ll need to consider factors such as the interest rate, fees, and repayment terms of the new mortgage, as well as any early repayment charges or exit fees associated with your existing mortgage.

Assessing the Impact on Personal Finances: Transferring property to a limited company can also have an impact on your personal finances, and it’s essential to consider this before making a decision. For example, if you currently receive rental income from the property as an individual, this income will now be received by the limited company. This can affect your personal tax position and may impact your ability to access certain tax reliefs or benefits.

Additionally, if you currently use the rental income to support your lifestyle or pay for personal expenses, you’ll need to consider how you’ll access these funds once the property is held within a limited company. You may need to take a salary or dividends from the company, which can have tax implications and may affect your overall financial position.

Seeking Professional Advice: Given the complexity of transferring property to a limited company, it’s essential to seek professional advice before making a decision. You should consult with a qualified tax advisor, accountant, and solicitor to ensure that you fully understand the implications of the transfer and to ensure that you’re making the best decision for your specific circumstances.

A tax advisor can help you understand the tax implications of the transfer, including any CGT and SDLT liabilities, and can advise you on how to structure the transfer in the most tax-efficient way. An accountant can help you understand the financial implications of the transfer, including the impact on your personal finances and the potential costs involved. A solicitor can help you navigate the legal aspects of the transfer, including updating lease agreements and ensuring that the transfer is completed correctly.

Special Cases and Considerations

Residential Properties: If you’re considering transferring a residential property to a limited company, there are some specific considerations to keep in mind. As mentioned earlier, one of the main benefits of holding residential property within a limited company is the potential for tax savings. By holding the property within a limited company, you can take advantage of the lower corporation tax rates on your rental income, as well as various tax deductions and allowances available to limited companies.

However, it’s important to note that there are some restrictions on the type of residential properties that can be held within a limited company. For example, if you’re considering transferring your main residence to a limited company, you may lose access to certain tax reliefs, such as private residence relief, which can exempt you from CGT on the sale of your main home.

Commercial Properties: If you’re considering transferring a commercial property to a limited company, there are some additional factors to consider. One of the main considerations is the potential need for a commercial mortgage to finance the transfer. Commercial mortgage rates are typically higher than residential mortgage rates, and you may need to provide additional security or guarantees to secure funding.

Additionally, the tax treatment of commercial properties held within a limited company can be more complex than for residential properties. For example, consider the impact of VAT on any rental income received from the property, as well as the potential for capital allowances on any qualifying expenditure.

Properties Held in Trust: If you currently hold your property within a trust structure, transferring the property to a limited company can offer additional tax efficiency. By holding the property within a trust and then transferring it to a limited company, you can take advantage of additional tax reliefs and exemptions.

However, the tax treatment of properties held in trust can be complex, and it’s essential to seek professional advice to ensure that you’re structuring the transfer in the most tax-efficient way. You’ll also need to consider the impact of the transfer on the trust’s beneficiaries and ensure that any necessary approvals or consents are obtained.

Partnerships: If you currently hold your property within a partnership structure, there may be additional considerations when transferring the property to a limited company. For example, you can take advantage of incorporation relief to reduce the CGT liability on the transfer.

However, to qualify for incorporation relief, the partnership must be operating as a genuine business, and the transfer must be made for commercial reasons. Additionally, you’ll need to consider the impact of the transfer on the other partners and ensure that any necessary approvals or consents are obtained.

In conclusion, transferring property to a limited company can offer significant benefits for landlords and property investors, including potential tax savings, limited liability protection, and easier succession planning. However, it’s essential to carefully consider the risks and disadvantages before making a decision, including the increased costs involved, potential CGT and SDLT liabilities, and restrictions on financing options. To ensure that you’re making the best decision for your specific circumstances, it’s essential to seek professional advice from a qualified tax advisor, accountant, and solicitor. They can help you navigate the complex tax and legal implications of transferring property to a limited company and ensure that you’re structuring the transfer in the most tax-efficient way. Ultimately, the decision to transfer property to a limited company will depend on your individual circumstances and financial goals. By carefully considering the benefits and risks involved and seeking professional advice, you can make an informed decision that helps you achieve your long-term property investment objectives.