Date
18 Aug 2023Category
Private Client ServicesA significant number of portfolio landlords are incorporating their portfolio as limited companies, which could save hundreds of thousands of pounds on Capital Gains Tax (CGT) and Stamp Taxes. However, with strict eligibility rules, 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 Stamp Taxes 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.
Incorporating as a limited company makes sense for long-term landlords looking to build their portfolio. However, doing so isn’t always straightforward and there could be costly consequences for landlords who don’t seek advice.
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 they then need the cash, they must take it by way of dividend and they 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.
Stamp Taxes are 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.
If you have any questions in relation to incorporating as a limited company or would like to discuss your specific tax liabilities, please get in touch with a member of our specialist team or your usual Azets advisor.
Information correct at time of publishing, but may be subject to change in future. This article is for general information only and is not intended to be advice to any specific person. You are recommended to seek professional advice before taking or refraining from taking action on the basis of the contents of this article.
