Following the introduction of the tax relief restriction on finance charges for residential lettings, we often receive enquires asking “should I incorporate my property rental business?“.
The restriction which has been introduced restricts the tax relief on finance costs to 20%, thereby increasing the cost of financing for higher rate or additional rate taxpayers renting out their residential property. The intention by the government being to increase the costs of gearing, when borrowing is being used to fund the purchase of property.
In considering to transfer residential properties to a limited company, many factors will need to be considered and the decision will depend on personal circumstances. The factors include:
- The interest restriction only applies to residential property. It does not apply to Furnished Holiday Lets or commercial property.
- Because of the potential taxation rates in the company, it is likely to be appropriate if rental profits do not need to be drawn but can be reinvested.
- There will be administration costs of running a company.
- The potential bank charges and fees for transferring any mortgages.
- Companies potentially suffer higher rates of interest on borrowing.
- Taxation costs.
Capital Gains Tax and SDLT are the two potential taxation charges when transferring property to a limited company.
Capital Gains Tax
There is a potential charge on transferring a property to a connected company based on the market value of the properties unless a rollover relief can be claimed.
The rollover relief is only available when properties are actively managed and a business exists (it should be noted the definition of a business is different to that of a trade).
To be treated as a business, there needs a significant degree of activity by the owner in overseeing the rental generation and in seeking to make a profit. It is recommended the individual maintains a careful record of time spent, for example over a 6 month period so can evidence the work carried out.
Stamp Duty Land Tax (SDLT)
SDLT will be charged at normal rates on the transfer of relevant assets to a limited company which is treated as connected to the transferor.
Reduced rates may apply, and other reliefs may be available if a number of properties are being transferred.
However, if the property was owned in a partnership before transfer, then the partnership provisions potentially allow the transfer to the limited company (owned by the connected parties) to be made without any SDLT charge.
Jointly owned property does not automatically fall to be treated as a partnership. For a partnership to exist as a minimum it is suggested there should be a
- A written partnership agreement.
- Separate partnership bank account.
- Genuine sharing of profit and losses.
- Preparation of partnership tax returns.
- Existence of the partnership for a number of years prior to incorporation.
Incorporating a property rental business is a complex issue and so if you require any advice or assistance, please get in touch with us.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.