Scores of portfolio landlords are incorporating their property portfolio as limited companies, which could save hundreds of thousands of pounds on Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). However, a leading tax expert has warned that strict eligibility rules and unintended consequences could prove costly.
Section 162 Incorporation Relief is available to UK landlords who incorporate their property portfolio as a limited company. It allows landlords to transfer their properties to a limited company without incurring a CGT or SDLT liability at the time of transfer.
For example, a landlord with five rental properties at a total value of £1 million, purchased for a total of £800,000, could save £56,000 on CGT alone through incorporation relief as a limited company.
According to new research by specialist buy-to-let lender Paragon Bank for Q1 2023, over six in ten landlords planning to buy a new rental property advised that they would do so within a limited company structure.
This follows a 5% increase compared to Q4 2022 and a year-on-year rise of 12% to mark a return to the high reported in Paragon’s PRS Trends report for Q2 2022.
Landlords who intend to purchase as an individual has fallen by 5% since Q4 2022 to 24%. Of those who plan to purchase within a limited company structure, 64% have six or more properties.
Rick Schofield, Tax Partner at UK top ten accountancy firm Azets, says incorporating as a limited company makes “absolute sense” for long-term landlords looking to build their portfolio. However, he warns doing so isn’t always straightforward and there could be costly consequences for landlords who don’t seek advice.
Rick said: “The first thing a landlord should consider when thinking about incorporating is whether they need their rental income to live off. Individuals can’t benefit from incorporation relief, but in a limited company structure, the company pays tax. If you then need the cash, you must take it by way of dividend and you pay tax again.
“Where a landlord is building a portfolio and doesn’t need the cash immediately, incorporating as a limited company makes absolute sense, but it isn’t straightforward and there are lots of ways to get it wrong. To qualify for incorporation relief on capital gains tax, the limited company needs to be a commercial business. This typically requires five or more properties that the landlord has owned for at least two years and can evidence managing agent hours and activities – for example, collecting rent, managing repairs, and vetting tenants.
“SDLT is more complex and there is a divergence of opinion around eligibility. Usually, landlords need to incorporate as a limited liability partnership, which then needs to conduct the business for a period of time. This is a grey area and, while most stamp duty lawyers accept two years, landlords must seek appropriate tax advice.
"There are other considerations, such as knock-on effects for people who are on means tested benefits, including children’s allowance. Unintentional consequences of incorporating can cost landlords a lot of money, so it’s critical to seek professional advice to ensure you optimise your position and can meet all the eligibility criteria for incorporation relief.”
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Can anyone answer this question:
If you try to show that you satisfy the requirements for Section 162 Incorporation Relief i.e. you are engaged in property management and maintenance activity for at least 20 hours a week,
then shouldn't you have been paying Class 4 National Insurance Contributions?
I couldn’t advise anyone made too many mistakes myself.
I believe that I would meet the criteria self managed 99% for 45 years, do pay class 4 Nat Insurance, 20 hours a week would be a holiday for me more like 70 hrs a week as well as the up keep, renewals and maintenance I have all the administration crap invented in recent years to keep my busy to 10.00 o’clock at night.
Is this hoop worth another jump ?.
I wouldn't like to advise either. It seems quite complicated.
There seem to be benefits but also drawbacks. It says on the Mercian webpage:
"The individual property owners could transfer the whole property business to a limited company and receive shares in that company in exchange for the properties. 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. Any future disposal of those shares could trigger Capital Gains Tax based on that value.
Interestingly, the company acquires the properties at their current value. If the company disposed of a property, it would be taxable on the growth in the value of the property since the transfer, but not the growth prior to the company."
I imagine that it could be possible to become a public limited company - one of "big boys" then. This is what it says about that on "Your company formations":
"A public limited company, or 'PLC' for short, is a company that is legally allowed to offer its shares for sale to the public. They don't have to offer shares to the public if they choose not to, but the option is there if and when needed. A PLC is not the most popular choice of company in the UK, in fact over 95% of limited companies in the UK are private limited companies. There are certain differences between the two, and there are specific requirements that a public limited company needs to meet.
With a PLC you need a minimum of two shareholders, but a private limited company will only need one.
There needs to be a minimum of two Directors registered within a PLC. Only one is needed for a private company.
Company accounts are required to be submitted to HMRC within 6 months of the end of the financial year. A private company is allowed 9 months for submission.
You need to have a fully-qualified Company Secretary appointed within a PLC, but a private company secretary does not need to hold qualifications.
There are a lot of advantages to becoming a public limited company, especially if you are interested in raising capital for your business. You can raise share capital from new and existing investors, and shareholders can buy and sell their shares, if they are quoted on a stock exchange. Nearly all significant businesses operate as an incorporated company. You can make acquisitions by offering shares to the shareholders of another firm, so building your business expertise and knowledge base as well as giving your company a more professional and prestigious public profile. Your company will have a separate legal identity, and having a legal existence separate from the management and the shareholders will mean having protection through limited liability. This has to be one of the most important aspects of incorporation, and will mean the members will only be liable for the amount unpaid on their shares should the business fail. Becoming incorporated will mean protection for your company name. Once registered, no-one else is allowed to use your company name to trade under. Sole traders and partnerships only have trademark legislation to protect their trading names, so you can put your mind at ease that as a PLC your company name will remain your legal property. Sole traders and partnerships have to pay basic rate or higher rate income tax. Public Limited Companies pay Corporation tax rates, currently set at 20%, on their taxable profits. There are also tax-deductible costs and allowances that can be offset against the company profits for even greater tax savings. There is a greater sense of continuity for your business once you have formed a PLC. No matter what happens to the company directors, management or employees, the company will remain in existence. The only way a company can cease to operate is when it is wound up or be put into liquidation by order of the courts or Registrar of Companies. With these advantages aside, there are always some disadvantages to forming a public limited company. These disadvantages are worth thinking about if you are already a private limited company who is thinking about changing over to become a PLC. Things to consider are: Once publicly traded on a stock exchange, your company will take on a much larger number of shareholders. If you have built up this business on your own from scratch, it may be feel a little painful to see your business divided up so much, as well as having to come to terms with losing overall control of your company. There will also be a greater number of shareholders to whom your company directors will be accountable. Your company will be at the mercy of greater public scrutiny over its financial performance and executive decisions. The company's worth and value will be governed by the financial markets, through the trading of company shares."
I looked into this a few years ago. I had a ltd company already and wanted to transfer my portfolio of rental properties into it. I was advised that I'd have to pay capital gains on the dozen or so properties I wished to transfer as it would be classed as a sale of the properties to the ltd company. I argued that I wanted to sell them cheaply to my ltd co to cut down on the capital gains but I was advised that the sale would have to go through at market value. Capital gains on the whole portfolio was going to cost a small fortune and not worth the cost for the advantages of having them in the ltd company.
Going forward.......if I was going to buy more rental properties, I'd definitely consider putting them in a ltd company....but I will DEFINITELY NOT be buying any more or creating any new tenancies in the future....it's a mugs game in Scotland now.
Weren't you eligible for Section 162 Incorporation Relief, Shane, so that you didn't have to pay capital gains tax at the point of transfer of your properties to the limited company?
One of the reasons that I was considering the possibility of incorporating was to set up a serviced flat business and therefore not be subject to the provisions of the Renters Reform Bill.
It was my understanding when I enquired some years ago if you run, manage & maintain the Properties you can do it and transfer but not hands free with an Agent running it.
That would be me Michael - I don't have an agent - I do everything myself. However, I am a bit worried about the consequences of incorporating, but may switch to serviced flats (with a minimum stay of 90 days requirement) whether or not I incorporate.
So the government can sell off assets to private companies ie British Rail, waterboard assets etc for a token £1 why can’t we follow with our assets to our companies?
The majority of landlords do so because everyone else seems to be and they are unaware of a more effective alternative. S162 CGT deferral is automatic, SDLT mitigation relies on ‘Ramsay’ However, even if this all checks out mortgage terms are in breach and profit will be taxed at 25%. There is no business asset relief so if legacy is important, further action is required. All in, it is expensive and the only real benefit is full relief on relevant loan interest.
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