Transferring Your Property to a Limited Company

Transferring your property to a limited company can help you to reduce your annual tax bill as the corporation tax is only 19% and there is no national insurance payment. However, this may not be the case for most of the landlords because the tax rate is increasing to 25% in first rise since 1970s. 

The following article will highlight the potential costs and the benefits of transferring your property to a limited company. 

Rental income is becoming less profitable for most landlords due to the removal of mortgage interest claims since April 2021. It is causing a major disruption for landlords as the tax bill for landlords has increased significantly. This should not pose a problem if you are a basic taxpayer as these changes will not impact you significantly. However, there is a tax disadvantage for higher taxpayers which is reducing a significant net profit on their property business. According to a senior professional at TaxCare Accountants, a higher taxpayer will be paying almost 30% more tax on their rental income compared to the basic rate of 20%. Forming a limited company and transferring the ownership to a limited company is an ideal tax-saving option for landlords. In order to transfer your property ownership to a limited company you may consider the following options:

Forming a limited company and transferring the ownership to a limited company is an ideal tax saving option for landlords.

Option 1 - Transfer ownership to a limited company

A limited company is a separate entity and the tax rate is lower than the personal tax rate.  You would need to consider the following expenses:

 

1. Stamp Duty:

Normally you are required to pay the stamp duty Tax. However, as you already formed a partnership, you probably do not need to pay the SD tax. It depends on meeting the following HMRC criteria:

 

  • Normally you are required to submit your partnership tax return for minimum of 2 years.
  • You would need to meet the definition of partnership ‘business’. Normally you need to spend more than 20 hours per week in dealing with your property business.
  • Whether if the partnership formation is formal ( You would need a formal contract).
  • Whether you are using the same name and right SIC code.

 

2. Capital Gain Tax:

You are also required to pay CGT when transferring the property. However, you can claim incorporation relief if you meet the criteria of partnership ‘business’.

 

3. Legal Fee:

There will be a legal fee involved when you transfer the ownership.  You are also required to apply for mortgage which almost 1% higher than normal rate.

 

4. Early redemption fee:

If your property is on mortgage then your bank may charge you an early redemption fee.

 

Transferring a property ownership to a limited company is a highly technical area. HMRC has increased the number of investigations into this since 2015. We recommend purchasing HMRC investigation insurance if you choose option 1.

Purchase HMRC investigation insurance if you plan to transfer property ownership to a limited area.

Option 2 - Set up a property management company

Alternatively, option 2 is an advanced and smart option. You will set up a property management company and lease out your property to the property management company. Your property management company will charge a management fee before transferring the rent to you. It will result in reducing your rental income and higher tax rate at 40%.

 

If you choose option 2 you would need to change the contract with your tenant and form a new contract between you and the limited company.

 

Transferring your property to a limited company is subject to complicated tax planning and advanced accounting implementation. If you are not sure what you are doing then please contact a professional as HMRC tax investigation on transferring property to a limited company has drastically increased since 2018. Please bear in mind the corporation tax rate will increase to 25% from April 2023. Once you have transferred the ownership it will be difficult to change to your personal name as you will need to pay stamp duty and capital gain tax again.


This article is drafted by a property tax expert from TaxCare Accountants.  The above article is not tax advice and TaxCare Accountants will not take any responsibility as the article is designed for blogging purpose. If you are looking for landlord guide to rental income and what expenses you can claim we have highlighted a separate blog for this article. 

 

You can contact TaxCare Accountants for a free initial consultation.

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