Interaction between Ramsay, Partnership Act 1890, schedule 15 FA2003 and landlord incorporationMake Text Bigger
Schedule 15 of the Finance Act 2003 is the piece of legislation which enables a partnership to transfer its properties to a company at the point of incorporation without paying SDLT. Link to HMRC guidance.
A Partnership is defined by the Partnership Act 1890 as “the relation which subsists between persons carrying on a business in common with a view of profit.” Link to legislation
There is no legislation which compels landlords to register a partnership with HMRC.
Incorporation relief under section 162 TCGA 1992 enables a business to roll capital gains into shares in the company which the assets of a business are transferred into Link to HMRC guidance
The case of Ramsay vs HMRC concluded in 2013 when HMRC unsuccessfully challenged a claim for incorporation relief on the basis that renting property does not constitute running a business. Link to HMRC’s subsequent guidance
The above are the key ingredients to tax free incorporation for landlords.
Now for a case study:-
Raj, Mital and Dave became close friends at University and went on to build a portfolio of 8 student HMO rental properties. Some are in joint names and some are in individual names, because that made it easier for them to get finance historically. However, all the rents, mortgages and other expenses associated with the property portfolio have always been paid into and out of the same bank account, and they have always split the profits equally between them. The properties have effectively been held ‘on-trust’ for the partnership. They have never registered a partnership but the law says they are one because they carry on business with a view to profit on the basis that they spend well over 20 hours a week managing their business. They all have additional sources of income and the section 24 restrictions on finance cost relief would have pushed them into the higher rate tax band and resulted in them paying significantly more tax. They have only ever withdrawn rental profits from the business. All proceeds of remortgages have been invested into buying more properties. They were able to transfer their properties to a Limited Company without paying CGT or Stamp Duty and as a result of this are no longer affected by the restrictions on finance cost relief. Their net effective tax rates, even after factoring in withdrawing all rental profits as dividends, will be considerably lower after incorporating as would otherwise have been the case.
The other major cost usually associated with incorporation is refinancing. However, this can be avoided. Here’s the link to a document explaining how.
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