May 27, 2021

Article

Following tax changes in the last few years there has been a greater interest in holding rental property in a limited company. This can have some advantages but there are also some pitfalls. In this article we will look briefly at this complex subject.

What are the advantages?

Companies pay Corporation Tax, currently at 19% but expected to rise to 25%. If income is accumulated in the company this can represent a significant tax reduction compared with income tax at 40% or 45%. In addition, there is no restriction on the offset of interest paid on borrowings within a company.

Transferring existing property

It is relatively straight forward if the company is buying new property directly from a third party. It becomes more complicated where you wish to transfer existing property into your own company.

There are two main taxes to consider. Firstly, there will be a capital gain on disposal of the property and, as you and the company are connected, that will be deemed to be transferred at market value. Secondly, the transfer will be subject to Stamp Duty Land Tax, again based on the market value.

Property Partnerships

Specific reliefs apply to both Capital Gains Tax and Stamp Duty Land Tax if your rental business is a property partnership. Capital gains can be deferred if a property partnership rental business is incorporated in exchange for shares [s162 TCGA 1992]. Special rules apply for Stamp Duty Land Tax on the transfer of property out of a partnership where the effective beneficial ownership is unchanged. This would apply to the transfer of property from a partnership to a company owned by the partners and effectively exempts the transaction from SDLT.

The difficulty is in establishing that there is a property partnership in the first instance. The mere joint ownership of property is insufficient. A partnership needs to carry on a business and the courts have interpreted this over the years as requiring more than passive joint ownership. There needs to be an element of activity, and scale, that indicates a business. There needs to be a partnership agreement, partnership accounts and tax returns to demonstrate that it exists. It is perhaps easier to demonstrate this where the partnership is established as a Limited Liability Partnership.

Summary

There is, therefore, a possible route to incorporation of a property partnership without a tax charge but this is a complex area and needs to be approached carefully. If you are considering this, please speak to your normal contact at Albert Goodman at an early stage.

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