Incorporation: Should I transfer my properties into a limited company?
A common question asked by property investors is regarding incorporation of properties held personally and whether the investor should transfer them into a limited company. Part 1 of this article will discuss some of the advantages and disadvantages of transferring properties held in investors' own names and discuss some of the circumstances when it might make sense to do so. Part 2 will then look at some tax mitigating strategies to transfer personally held properties into a limited company as well as discussing some alternative way of reducing tax.
Why a limited company in the first place?
Since the introduction of Section 24 by the government, the limited Company structure has grown in popularity amongst property investors. This is largely due to the fact that it offers investors the opportunity to deduct mortgage interest as an allowable expense and benefit from a low corporation tax environment.
What is Section 24?
Section 24 of the finance act was introduced in 2017 by the government. In simple terms It gradually reduced private landlords ability to deduct mortgage interest as an allowable expense. This was phased in over 4 tax years and from tax year 20/21 Landlords are only able to deduct a 20% relief for finance costs. This has a big impact on higher rate and additional rate investors who were previously able to deduct a relief for finance costs at their marginal rate of tax.
Should you be investing in a limited company?
Whether or not investing in a limited company makes sense is based on your own circumstances. If you are unsure as to whether investing in a limited company is the right choice for you then you should start by reading should I invest in property via a limited company. This article will assume that you have already made the decision that investing through a limited company is right for you for future purchases. But what about properties that you own personally? Does it make sense to transfer them into a limited company?
Why would you want to transfer property into a limited company?
The primary motivations behind someone considering transferring properties into a limited company is in order to pay less tax. Higher rate taxpayers will be drawn to the fact that they will pay corporation tax on their rental profits at 19%, when compared to being taxed personally at 40% or more. If an investor owns one property that makes £8,000 of rental profits then the difference in tax can be significant:
Limited Company £8,000 x 19% = £1,520
Own name higher rate taxpayer £8,000 x 40% = £3,200
Potential Tax Saving £1,680 (52.5%)
We can clearly see that from a taxation perspective it makes sense for a higher rate taxpayer to consider transferring their personally owned property into a limited company. Meanwhile an investor who owns property personally will achieve minimal tax advantages from transferring their property into a limited company. The ability to deduct mortgage interest as an allowable expense is another reason to consider a limited company, particular for a higher rate taxpayer. If they invest personally then they may get a 20% relief for finance costs. Prior to section 24 mortgage interest was an allowable expense meaning they would have achieved a deduction equal to their marginal tax rate.
Reasons to not incorporate
It might seem like a good idea to transfer property into a limited company to benefit from some of the advantages mentioned above. However the process can be expensive and therefore it is important that investors weigh up the costs of transferring personally owned properties into a limited company with the actual tax savings they will make. The main costs involved are:
Capital Gains Tax. The transfer will be deemed to be effectively a sale from the individual to a company. This will mean that the Capital Gain tax will be chargeable at 18% or 28% (for a higher rate taxpayer). Depending on the investors circumstances there may be some reliefs available. The most notable is incorporation relief which will be discussed in the second part of the article.
Stamp Duty Land Tax. Similarly as above, the transfer is treated as a transaction and SDLT will be payable. This will be at the higher rate because it is a corporate purchase. There may be a way to mitigate this tax which will be discussed in the second part of the article.
Frictional Costs. You will need to employ the services of conveyancers and brokers. As with any other transaction this will come with a cost.
Higher Costs of Finance. During incorporation it is likely that the investor will be required to refinance their properties which will result in additional costs. Limited companies also typically pay higher rates of interest than sole trader landlords. This can be as much as 1.5% more and therefore this increased cost needs to be factored in.
The first part of this article has discussed some of the advantages and disadvantages of transferring personally held property into a limited company. Part 2 will then look at some tax mitigating strategies to transfer personally held properties into a limited company as well as discussing some alternative way of reducing tax.
Accufy Accounting can help you decide whether incorporation is right for your circumstances. If you would like to talk through this with someone then please get in touch.
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