Can you transfer personal property into a limited company?

Can you transfer personal property into a limited company?

One of the regular questions we are asked is about transferring property into a limited company, whether this is possible, the rules surrounding this and what the advantages and disadvantages are of such a transfer.

Transferring property into a limited company can bring tax benefits because you pay corporation tax rather than income tax on income earnt from the property. There may be other benefits including tax relief on mortgage interest, the ability to claim allowable expenses and limited legal liability.

In this blog we look at the advantages and disadvantages of such a transfer.

 

Transferring a personal property into a company

If you hold one property (maybe a previous home or you've inherited a property) or hold a personal property portfolio of numerous buy-to-let properties, then you should consider transferring it into limited company ownership. Such a transfer can provide tax advantages if done correctly and with professional advice from a qualified tax advisor.

Limited companies are separate legal entities to the individuals that run them and therefore, they attract different tax charges that can often be lower than some personal tax rates. A limited company can also protect you from risk as it has limited liability. However, you should be aware that transferring personal properties into a limited company without expert advice could trigger substantial tax charges if not done correctly.

 

What are the tax considerations when transferring property?

There are several tax considerations when transferring property or properties to a limited company.

Taxes to consider are:

• Corporation tax

• Income tax

• Stamp duty land tax (SDLT)

• Capital gains tax (CGT)

• Inheritance tax (IHT)

We look at each of these areas in more detail below.

 

Advantages of property transfer

Corporation tax and personal income tax

Savings on tax can be made as you will pay corporation tax on any rental profits from the property in a limited company, and corporation tax rates can be lower than paying income tax (depending on your income).

The rates for corporation tax currently range from 19% - 25% (dependent on profits). Rates for personal income tax are 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.

There may also be personal tax savings if you undertake tax-efficient profit extraction from the limited company vs the personal tax you pay as a sole trader.

You could add your spouse (for example, as a non-executive director or shareholder) to your limited company, and this may give you additional tax benefits and savings on income tax via their tax-free allowance, lower tax thresholds and by drawing dividends from the limited company.

Funds after tax could be retained in the company as ‘cash reserves’ and later reinvested into properties. This can be paid out as dividends to you and other shareholders (such as your spouse) or used to top up director pensions.

 

Allowable expenses

Owning a property through a limited company will allow you to deduct allowable expenses and mortgage interest from your rental income to reduce the amount of profit and, thereby, the amount of corporation tax you pay.

 

Mortgage interest

Landlords that rent out personally owned properties can no longer directly deduct any mortgage interest from their rental income to reduce their tax bill. This is instead done by giving the individual a 20% tax reducer meaning that higher rate and additional rate taxpayers miss out on further tax reductions. As a limited company, the mortgage interest is fully deductible still. This is a large incentive to many people to encourage them to transfer property into a limited company.

Note: If there is an existing mortgage on a property, then some mortgage lenders may not allow you to move the property into a limited company. Speak to your mortgage lenders first before moving property into a limited company.

 

Incorporation relief and capital gains tax

There could be savings in capital gains tax when you transfer into a limited company. This is because you can receive shares in that company in exchange for the properties. At this point, capital gains tax is not triggered because the new shares in the company have a reduced base cost for tax purposes, equivalent to the original cost of the properties. However, it is worth noting future disposal of those shares could trigger capital gains tax based on that value.

If you own a property portfolio, you may benefit from incorporation relief. However, this relief is only available to property businesses and not to those who merely own property investments. HMRC generally accepts that a property business exists where a person works 20 hours a week or more on the properties.

The property portfolio should contain a sufficient number of properties to justify the time spent working in the property business. The whole property business must be incorporated as a going concern to qualify for the relief. This relief means you will not pay any tax until you sell (or ‘dispose of’) the shares.

To qualify for Incorporation Relief, you must:

• be a sole trader or in a business partnership

• transfer the business and all its assets (except cash) in return for shares in the company

The company would acquire the properties at their current value, and if the company disposed of the properties, it would be taxed on the growth in the value of the property since the transfer (not the growth prior to the company).

 

Inheritance tax (IHT)

Having a limited company property business can potentially provide IHT savings. For IHT purposes, your estate owns the shares in the limited company, and the value of those shares reflects the value of the properties owned by the company.

The use of tailored types of shares may offer long-term IHT protection for future growth in the value of the properties. This could be achieved by setting up a Family Investment Company or via loans and director's loan accounts, which could also be used to reduce IHT exposure. Seek professional tax advice before taking any action.

 

Limited liability

Your legal and financial liability is minimised with a limited company if there are legal issues or financial losses within the company (unless you have given personal guarantees for borrowing).

Setting up a limited company provides legal separation between individuals and the business, as the owner of a limited company, you are not responsible for company liabilities. Within a limited company, you are not obliged to use your own funds to pay off debt, giving you more protection and limiting your legal liability.

 

What are the disadvantages of transferring property to a limited company?

There can be disadvantages of transferring property into a limited company structure, so before you make the decision, you need to be aware of potential disadvantages and seek professional advice. The advantages and disadvantages of owning property in a limited company, may be dependent on the number of properties you own or plan to own.

The disadvantages can be as follows:

 

Ownership

The properties will no longer owned by you as an individual when you transfer your property into a company. You will instead own shares in the company, this may give rise to complications with your mortgage lender as you can't personally mortgage an asset you don’t own, and your mortgage company may not agree to transfer their mortgage over to a limited company.

 

Mortgage costs

Your mortgage costs may rise on transfer because you will likely have to pay off the existing personal mortgages and take out new commercial mortgages, this is likely to be requested by your mortgage company. Finance costs of commercial mortgages and buy-to-let mortgages tend to be more expensive due to higher rates of interest.

 

Stamp Duty Land Tax (SDLT)

There will be an initial financial outlay to consider when transferring the property. This is because you may pay Stamp Duty Land Tax (SDLT) based on the open market value of the property at the point of transfer.

Additionally, the company may have to pay the 3% surcharge applicable to residential properties. The transfer could be beneficial in cases where an individual is buying a second home and wants to retain their current home for rental purposes. If the current residence is transferred to a limited company before purchasing the new home, the transaction will not be subject to the 3% higher rate applicable to the purchase of second residential properties.

If the current home is transferred to a limited company within 3 years of purchasing the new home, the 3% surcharge paid on the new property can be claimed back from HMRC.

 

Other costs

You will need to consider that there will be additional costs involved when running a limited company, such as legal fees and accountancy fees for preparing accounts and costs for completing personal and corporation tax returns etc. However, savings often outweigh these additional costs, so it is worth working with a qualified tax advisor and accountant such as Haines Watts to calculate the costs and savings for your own personal circumstances.

 

Contact Haines Watts accountants for tax advisory

Many landlords opt to run their property portfolios within a limited company as it is generally the most tax-efficient option. However, even if you've inherited a second property, buying a second property or are planning to purchase several properties in the future, there can be many benefits and tax savings when you transfer property ownership into a limited company. The benefits depend on your own personal circumstances, so doing so without professional tax advice could trigger additional tax charges.

We advise many individuals and landlords on the best way to hold property and how to transfer property into a limited company. We recommend you work with Haines Watts to ensure you undertake the transfer properly and avoid unnecessary charges.

For professional help and advice when transferring your property into a limited company, contact our team in Chester, Liverpool, or Wirral.