07 August

Transferring Property to Limited Company

What are the costs involved at the time of transfer :

1. Stamp Duty for transfer

2. Capital Gains Tax subject to the annual allowance.

3. Solicitor Fee

4. Mortgage exit charges

TYPES OF LIMITED COMPANIES:

Corporate Landlord

There are different types of the company but the one most commonly used for property tax planning is the private company limited by shares. Shareholders are the owners of the company, which is administered by directors (who may also be the shareholders). There are advantages and disadvantages of a company owning property. Although companies do not have a personal allowance, if the profits from a property business owned by an individual(s) are charged at the higher personal tax rates, it could potentially be more beneficial for the properties to be owned by a company. At 19%, the corporation tax rate is lower than the tax rates charged on self-employment. However, once this tax has been paid, there may be further tax costs should the shareholder make any withdrawals.

Tax relief on interest paid on loans by individual property investors is being restricted such that by 6 April 2020, interest will not be a fully allowable expense but will only attract tax relief at 20% as an income tax reduction. These new rules will not apply to interest on loans incurred by companies

· A limited company is a separate legal entity from the shareholders.

· Profits and losses belong to the company.

· The company can continue regardless of the death, resignation, or bankruptcy of the shareholders or directors.

· The liability of shareholders is limited to the amount unpaid (if any) on the shares held.

· If the company fails, the shareholders are not normally required to make good the deficit (unless personal guarantees have been given).

· A company may find it easier to raise finance.

Management Company

A higher rate taxpayer landlord may be able to achieve some benefit from the lower rates of corporation tax whilst retaining ownership of the properties by incorporating a company that collects the rental income on behalf of the landlord.

A set amount is deducted from the rental income received into the company’s bank account as a management charge for the service role of managing the property business. The balance of income less running expenses of the company is then paid to the landlord. The management/service charge is thus a fully allowable expense against the rental income received in the hands of the landlord.

It is suggested that a landlord can benefit from this form of tax planning should they own at least four or five properties, as the cost of preparation of company accounts are higher than for a sole trader/property investor’s accounts. In addition, the higher the number of properties, the higher the management charge and the higher the tax relief thereon.

Pros:

1. Lower Tax Rates of Corporation Tax.

2. Tax treatment of Mortgage Interest (section 24)

3. Transferring of ownership to save inheritance tax. Example: Gift of shares to

family members will be potentially exempt transfer.

4. Limited Liability – our liability will be restricted in case winding-up.

5. If you transfer more than 5 properties to limited company, you need not pay CGT / SDLT

Cons:

1. Mortgage Availability

2. Personal Tax Issues when you don’t re-invest

3. Additional costs of compliance

4. Loss of some tax-reliefs (Ex; Annual Allowance)

5. Mortgage exit charges, SDLT.

6. You cannot buy your Main residence property through Limited Company

How to sell the property from Ltd Company:

By transferring the shares of the company to the buyer. Buyer will save Stamp duty by paying lower rate SDRT @0.5% so that you will have a bargaining advantage to your property value.

*The above listed is just guidance and not the decision. The plan might differ from individual case to case. Please do contact a tax expert before you make a final decision.

 

 

 

 

 

 

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