Financing Tips on transferring rental properties into a companyMake Text Bigger
Whilst this article focuses on financing tips it also touches on the tax consequences of transferring privately owned rental property businesses into a company.
Novation – this is a process where mortgage contracts are re-written to make the borrower a company as opposed to an individual. Personal Guarantees are generally required. Not all mortgage lenders provide this service. However, if you have mortgages with Paragon they provide this service for a very reasonable admin fee.
New Finance – if your mortgage rates are circa 4% or above it may well be advantageous for you to look at taking out new mortgages. There are some particularly competitive Limited Company mortgage deals available at the moment. A common misunderstanding is thinking this is refinancing. It isn’t. Your company is buying the properties from you, so the mortgage application needs to be dealt with as a purchase. The ‘deposit’ can either be an exchange of equity for shares in the new company or a Directors Loan. However, be very careful about creating Directors Loans because this can have nasty tax consequences.
Tax reliefs to be mindful of
If you sell your entire rental property business to your company at the same time (i.e. the ‘whole business’) you may well be eligible for incorporation relief. This allows you to offset capital gains you crystallise when selling the properties against the shares you take in exchange. You can read more about this on HMRC’s website via THIS LINK.
Stamp Duty relief automatically also applies when a business partnership transfers its ‘whole business’ to a company. Where two or more people are engaged in business with a view to making a profit they are regarded as a partnership in law. Only businesses engaged in trade are required to register as a partnership with HMRC. Property investment can be a business but does not necessarily constitute a trade, hence property investment business partnerships are not required to be registered as partnerships with HMRC to qualify for this relief.
It is very important to ensure that all sale transactions occur at the same time in order to qualify for these incorporation reliefs. You will need a Business Sale Agreement to be drafted and this will need to be submitted to HMRC when you produce CGT returns in regards to the sale of the properties. Stamp Duty returns are not required in most cases.
Avoiding the need to refinance when selling your rental properties to your own company
If you have mortgages which are subject to early repayment charges, or if the terms are particularly attractive, you may not wish to change them.
There are two structures available to achieve this in England and one in Scotland. One requires full conveyancing (the one available in Scotland) and the other doesn’t. They are too complex to go into detail about in this short article. However, we do explain these structures to our tax consultation clients where they are relevant to their objectives.
These strategies can be used on a stand-alone basis or in conjunction with Novation and/or new financing.
Commercial reasons for transferring your rental property business into a Limited company
There are several reasons for landlords to consider moving their rental property businesses into a Limited Company, not least of which is to ‘ring-fence’ potential liabilities which have increased significantly with the recent onslaught of regulations landlords need to abide by. Rarely does a week go past now where media fails to report on landlords facing five or six figure fines for what most would consider to be trivial oversights. Nevertheless, moving a rental property business into a company status is considered by HMRC as a sale of property, so careful consideration is required in regards to CGT and Stamp Duty implications (or LBTT for properties in Scotland).
Landlord Tax Planning Consultations
Our consultants can help you to consider the financial viability of transferring your rental property business into a company from a tax perspective.
Following a detailed fact finding exercise your Property118 tax consultant will produce a bespoke report and recommendations for you and your existing professional advisers to consider. This report will provide layman’s explanations of the pros and cons of restructuring and the process recommended process. Links to the HMRC manuals giving examples and technical details of tax reliefs available will also be provided. The report will also provide quotations for the cost of implementing any recommended restructuring and will also be sent to a leading Barrister-At-Law for Counsel’s opinion. If our recommended barrister concurs with our recommendations he will adopt them as his own professional advice to you when you instructing him to deal with the necessary legal work.
For you own peace of mind, you should also note that advice of this nature, from a Barrister-At-Law, effectively comes with a personal guarantee that it is right. If his advice is wrong then he is personally responsible for putting things right for you, including making good losses you reasonably incur. This is why the barrister we recommend carries Professional Indemnity Insurance of £2,500,000 per claim. Unlike solicitors and accountants, all barristers must be self-employed and cannot disconnect themselves from personal accountability for their advice by forming Limited Liability Partnerships or Limited Companies.
From a tax perspective, one of best reasons to consider selling your property rental business to your own company is that incorporation relief can ‘wash out’ some or all capital gains to date’. The fact that capital gains are rolled into shares means that you could sell any number of your properties the day after incorporation at market value without having to pay any additional tax. This is because you would be selling them for the same price as the company acquired them. This is particularly useful if you want to use net sale proceeds to pay down debt, or if you would like to sell any poorly performing properties and utilise the proceeds of sale to purchase others with better returns.
Other reasons to consider selling your property rental business to your own company are that companies are unaffected by the section 24 restrictions on finance cost relief, and that there are far more options available for IHT planning in regards to gifting shares in a property company than there are with privately owned properties.Show Form To Book A Tax Planning Consultation