Are you transferring private property assets into a limited company? Make sure you know about your tax liabilities.
‘Incorporating’ your existing property business – i.e. transferring ownership of your properties to a limited company – can give rise to tax liabilities. Because the vendor (individual) and the purchaser (company) are separate legal entities, the law views it as a transaction like any other.
Most importantly, the law views the transaction as a market value sale, irrespective of the consideration actually given.
The company pays Stamp Duty Land Tax (SDLT) on the acquisition
For the purposes of SDLT, HMRC deems the sale of a property to a company connected to the vendor to take place at market value (FA 2003, s. 53(1) and CTA 2010, s. 1122(3)). This means that stamp duty is payable on the market value of the property as at the day of the transfer.
The company must claim relief for higher SDLT rates on purchases worth £500,000 or more
As per FA 2003 sch. 4A, certain corporate bodies pay a higher SDLT rate of 15% on properties valued over a certain amount. This was originally £2 million, but the FA 2014 s. 111 lowered the threshold to £500,000.
Unlike the ordinary rates for residential purchases, the higher 15% rate applies to the entire purchase price.
Certain property businesses can claim relief from the higher rate. Excluded businesses include those that let, trade or redevelop properties.
Exclusions are subject to specific conditions that HMRC outlines in its Stamp Duty Land Tax Manual: SDLTM09500. Notably, HMRC will claw back the extra SDLT payable if the business ceases to meet any of the conditions, business activities do not begin, or the business ceases trading within the first three years after acquisition (SDLTM09660).
The individual pays Capital Gains Tax (CGT) on the sale
Transferring an asset to a limited company will also usually give rise to a Capital Gains Tax (CGT) liability.
TCGA 1992 s. 286(6) treats a company and an individual who wholly or partly controls it as ‘connected persons’. S. 18(2) of the Act treats a transaction between connected persons as “otherwise than by way of a bargain made at arm’s length”, which s. 17(1)(a) always treats as a market value transaction.
So much like the company must pay SDLT upon the acquisition of a property, the private individual must pay CGT on its disposal (in the event that the market value has increased since they originally acquired it).
Incorporation relief may apply under certain circumstances
TCGA s. 162 holds that incorporation relief applies where an individual transfers a business to a company in exchange for shares. Incorporation relief allows the individual to delay their CGT payment until they dispose of the shares.
Whether this relief applies to the transfer of a property business is a point of contention. HMRC typically considers property management an investment activity and accordingly denies incorporation relief.
The First Tier Tribunal often upholds these decisions if they are appealed, as was the case with Elisabeth Moyne Ramsay v HMRC  UKFTT 176 (TC). However, the appellant took her appeal to the Upper Tier Tribunal, who reversed the FTT’s decision. The UTT concluded that the appellant’s activities were “sufficient in nature and extent to amount to a business”: Elisabeth Moyne Ramsay v HMRC  UKUT 0226 (TCC).
Judge Roger Berner noted that where the level of activity exceeds that which a passive investor, “even a diligent and conscientious one”, might undertake, it in his judgement amounts to a business. Central to this decision was that Mrs Ramsay and her husband spent approximately 20 hours per week attending to administration, property maintenance, rent collection and other management activities.
More recently, and equally significantly, the FTT concluded in Paul Roelich v HMRC  UKFTT 579 (TC) that the appellant was entitled to incorporation relief on the transfer of his property development consultancy business.
So incorporation relief on a property transfer is not guaranteed. But case law sets a precedent that if you undertake most or all of the property business activities, you may be able to claim it.
Other costs to bear in mind
If you have financed your property with a mortgage, you will likely incur a number of finance-related costs when you transfer it to a company.
Unless you can repay your buy-to-let mortgage in its entirety, you will need to obtain a new one in your company’s name, which may be slightly more expensive than an equivalent product intended for individual borrowers. You will also need to meet the costs typically incurred when taking out a mortgage, such as lender fees and solicitor’s costs.
Furthermore, if you are repaying your old mortgage before the date originally agreed with your lender, there may be early repayment charges (ERCs) to pay.
Speak to a buy-to-let mortgage broker for assistance finding suitable finance for your limited company acquisition. And of course, be sure to discuss your personal circumstances with a tax advisor to determine whether incorporation is the best option for you.