What is Incorporation, and how can it boost your portfolio profits? Property tax expert Sean Hughes answers your most frequently asked questions about this complex property finance process.
In this guest article, Sean Hughes, Comprehensive Tax Planning, covers the basics of Incorporation Relief to help you better understand Incorporation.
Please note this is an introduction to Incorporation Relief - you should always seek professional tax advice before making property investment decisions.
What is Incorporation Relief?
When property is transferred from personal name(s) to a limited company there are potentially two taxes which could arise: Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).
Incorporation Relief is a tax relief available to landlords and property investors that allows you to mitigate CGT when you transfer the property into your Limited Company.
Why would you want to do it?
There are several potential benefits on offer from Incorporation, such as:
- Offsetting your mortgage interest
- More tax-efficient portfolio
- For some. Landlords need to “run the numbers” to ensure incorporation would result in a tax saving based on their unique individual circumstances
- Lower tax costs when selling the properties
Who is eligible for Incorporation Relief?
To qualify for Incorporation Relief, you have to demonstrate that the level of activity undertaken in relation to the properties amounts to a “business”.
For your portfolio activity to be recognised as a business and to qualify for Incorporation Relief, , on average, 20 hours per week, must be spent on the portfolio. Consequently, someone with 1 or 2 single buy to let properties will almost certainly not qualify for Incorporation Relief.
The landmark case that opened the doors to this tax planning is the case of Elisabeth Moyne Ramsay. Mrs Ramsay was very hands-on, and it was demonstrated that she spent, on average, 20 hours per week managing her properties.
However, due to other areas of legislation, if a person spends an average of 10 hours per week on property activity, they are still likely to qualify for Incorporation Relief. HMRC does not specify precisely how many hours are required to qualify, meaning it’s essential that you work with an expert tax professional to discuss the best option for your property investments and understand any potential risks if under 20 hours per week is spent on the portfolio.
What is the process?
The properties are transferred to a limited company, all on the same date. In return, the landlord receives shares in the company.
Care has to be taken to ensure all assets of the portfolio are transferred for Incorporation Relief to be available.
How much does it cost?
While the costs may vary, the professional fees involved with incorporation are typically around £15,000.
Is it legal/recognised by HMRC, and are there any risks?
Yes, the process is legal, and HMRC is well aware of taxpayers incorporating their portfolios. In fact, before October 2017, HMRC offered “pre-transaction clearance”, allowing applicants to ask if they would qualify for Incorporation Relief given all the facts and figures involved. However, due to the volume of requests, HMRC had to stop providing these types of clearances.
In my opinion, there are two main risks to consider:
1) Not being able to demonstrate that a significant number of hours is spent on the portfolio, therefore not meeting the key criteria for the relief
2) the paperwork being completed incorrectly by an inexperienced, non-tax-qualified person
Written by Sean Hughes
Comprehensive Tax Planning
Please speak to a professional tax advisor before making any property investment decisions.
What about my existing mortgages?
As your mortgage broker, we will search the top Limited Company rates available to meet your needs. We will then liaise with your solicitor to arrange for Incorporation to occur at the same time the mortgages complete. This allows for a seamless process.
It’s important to remember that the Incorporation Relief is only available on one transaction, so it’s usually best to incorporate all your properties (or as many as possible) at once.
Getting started
See what rates you could access by speaking to our mortgage experts. We can also refer you to our partners at Comprehensive Tax Planning to help you fully understand the process and make informed property investment decisions.
Get in touch with our team by calling 0345 345 6788 or submit an enquiry here.
