Transferring your property to a limited company can help you to reduce your annual tax bill as the corporation tax is only 19% and there is no national insurance payment. However, this may not be the case for most landlords because the tax rate is increased.
This article highlights the potential costs and benefits of transferring your property to a limited company.
Rental income is becoming less profitable for most landlords due to the removal of mortgage interest claims since April 2021. It is causing a major disruption for landlords as the tax bill for landlords has increased significantly. This should not pose a problem if you are a basic taxpayer as these changes will not impact you significantly. However, there is a tax disadvantage for higher taxpayers which is reducing a significant net profit on their property business.
A higher taxpayer will be paying almost 30% more tax on their rental income compared to the basic rate of 20%. Forming a limited company and transferring ownership to a limited company is an ideal tax-saving option for landlords. To transfer your property ownership to a limited company you may consider the following options:
Option 1 – Transfer ownership to a limited company
A limited company is a separate entity and the tax rate is lower than the personal tax rate. You would need to consider the following expenses:
1. Stamp Duty
Normally you are required to pay the stamp duty Tax. However, as you already formed a partnership, you probably do not need to pay the SD tax. It depends on meeting the following HMRC criteria:
- Normally you are required to submit your partnership tax return for a minimum of 2 years.
- You would need to meet the definition of partnership ‘business’. Normally you need to spend more than 20 hours per week in dealing with your property business.
- Whether the partnership formation is formal (you would need a formal contract).
Whether you are using the same name and the right SIC code.
2. Capital Gain Tax
You are also required to pay CGT. However, you can claim incorporation relief if you meet the criteria of partnership ‘business’.
3. Legal Fee
There will be a legal fee involved when you transfer the ownership. You are also required to apply for a mortgage which is almost 1% higher than the normal rate.
4. Early redemption fee
If your property is on mortgage then your bank may charge you an early redemption fee.
Transferring property ownership to a limited company is a highly technical area. HMRC has increased the number of investigations into this since 2015. We recommend purchasing HMRC investigation insurance if you choose option 1.
Option 2 – Set up a property management company
Alternatively, option 2 is advanced and smart. You will set up a property management company and lease out your property to the property management company. Your property management company will charge a management fee before transferring the rent to you. It will result in a reduction in your rental income and a higher tax rate of 40%.
If you choose option 2 you would need to change the contract with your tenant and form a new contract between you and a limited company.
For all your property, trusts and investment advice, contact us on 01162858080 or email lawyers@bondadams.com.
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0116 285 8080
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