Using a company to reduce tax for buy-to-let properties
QUESTION: My husband and I have built up a portfolio of buy-to-let properties in Belfast and Coleraine. The buy-to-let mortgages are almost repaid and we are considering the idea of putting these properties into a limited company owned by my husband and I. Can you explain the tax implications of doing this and the impact going forward?
ANSWER: There have been a significant number of adverse tax changes in recent years that have an impact for buy-to-let investors – changes to loan interest relief, wear and tear allowance and stamp duty have adversely affected the buy-to-let sector especially for personally held property.
A company is increasingly becoming a much more attractive place to hold property given that companies pay tax at a flat rate on all their profits – currently 19 per cent but increasing to 25 per cent in April 2023. The 19 per cent rate will still apply where company profits are less than £50,000 each year.
This contrasts against a possible 45 per cent for personally owned property. The difficulty however is getting your properties into the company as this normally triggers stamp duty land tax (SDLT) and capital gains tax (CGT) on the change of ownership/ transfer of the properties from personal ownership into a limited company.
CGT is the first important tax to consider on incorporating a property business. From a tax perspective you and your husband are connected with the new company acquiring your properties, the properties are deemed to transfer at market value even if no consideration passes from the company to you. There is however the opportunity to use a CGT deferral relief on the incorporation as this relief can cover the incorporation of property businesses provided three conditions are satisfied, namely:
:: All of the assets of the business are transferred to the company;
:: The business is transferred as a going concern; and
:: The consideration for the transfer of the assets/business is satisfied by the issue of shares to the vendor.
Provided the above conditions are complied with then any gain that would arise on the disposal of the properties at market value to the company is deferred by being ‘rolled over' into the base cost of the new shares. Another important benefit of this is that the properties are rebased to market value when they transfer into the new company therefore reducing the tax cost of future disposal for the company.
SDLT is the second tax to consider and is charged on the actual consideration passing between buyer and seller and is not normally levied on deemed market value. For this reason, property can be gifted free of debt without an SDLT charge. However, an unfortunate exception to this rule is when property is transferred to a connected company where the deemed market value rule is applied.
However, there is an important exemption. In circumstances such as your own, where property is owned jointly, it may be possible to avoid the SDLT charge on the property transfers to the new company provided that you can demonstrate that you are presently engaged in a property partnership business (as opposed to a co-ownership).
There are reliefs for the incorporation of a property partnership however it is important to be able to demonstrate that a partnership actually exists. A partnership would typically be evidenced by:
:: A set of annual partnership accounts;
:: A partnership tax return being submitted annually;
:: A partnership bank account and any borrowings being in the name of the partners/partnership;
:: A partnership agreement.
If a partnership does not exist and you try and create one prior to incorporation then HMRC will seek to deny the valuable stamp duty reliefs with serious adverse tax implications.
Finally, if a partnership exists and you plan to incorporate, you will need the support of your bankers in the switch to a corporate owner for any outstanding mortgages.
:: Feargal McCormack (firstname.lastname@example.org) is partner at FPM Accountants Limited (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.