SDLT on Rental Property Business Incorporation

by Mark Alexander

9:45 AM, 20th January 2016
About 3 years ago

SDLT on Rental Property Business Incorporation

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SDLT on Rental Property Business Incorporation

It is our view that SDLT will be payable on transfer on the full value of property even if only the beneficial interest is transferred to the limited company, exactly the same as would be the case if the legal title was transferred. SDLT on Rental Property Business Incorporation

Our understanding is that prior to 1st April 2016 the rate of SDLT payable when six or more residential properties are transferred is that SDLT at a rate of 0% and 4% will become payable. The rate will be calculated by establishing the average property value and then applying the following table:-

Property or lease premium or transfer value SDLT rate
Up to £150,000 – freehold or leasehold with annual rent under £1,000 Zero
Up to £150,000 – leasehold with annual rent of £1,000 or more 1%
£150,001 to £250,000 1%
£250,001 to £500,000 3%
Over £500,000 4%

HMRC reference LINK – note that “6 or more residential properties bought in a single transaction” are treated by HMRC and charged at “Non-residential and mixed use land and property rates

Example: if your average property value is less than £250,000 you will need to pay 1% SDLT. I’ve heard it suggested on more than one occasion that very low properties could be added to a portfolio in order to lower the average value to just below the nearest banding. In some circumstances this may well make sense.

SDLT Relief

If you are incorporating a rental property business partnership then you may well be eligible for additional SDLT reliefs at the point of incorporation in order to mitigate SDLT completely. However, the property must have been purchased by the partnership from day one, otherwise three or more years needs to have elapsed since the transfer, otherwise you will be caught by HMRC’s GAAR (General Anti Abuse Rule). Therefore, beware anybody who tells you that creating a partnership by transferring some equity to a spouse (CGT free) just prior to incorporation will qualify you for SDLT relief – it wont!

Sadly there is no relief for sole traders or joint owners who have not traded as a partnership.

How are property values established?

To check that transfer values are realistic HMRC may use the HMLR House Price Calculator. It has been suggested they will consider tolerances of 5% either way. The alternative is to get professional valuations. It makes sense for the valuation to be as high as possible because the valuation that is accepted becomes the new base price for taxation purposes when properties are sold.

UPDATE following the Budget on 16th March 2016

Stamp Duty on commercial transactions is to be reformed. Our understanding is that bandings will be applied similar to residential property, albeit with a zero rate up to £150k and then 2% of any amount over £150K and up to up to £250K and then 5% of any amount over £250k. As an example, on a property that costs £300,000 the SDLT would be £4,500 – i.e. £0 on the first £150k, 2% on the next £100k (£2,000) and finally 5% on the next £50k (£2,500). If our understanding is correct then this will also impact on on related transactions of 6 or more connected property transactions (e.g. at incorporation of a property portfolio).

Where can I learn more?

We commissioned a team of experts to produce a comprehensive analysis tool to enable you to consider all of the costs and benefits associated with incorporation vs remaining as an individual landlord or partnership. Investing £97 to purchase the spreadsheet and some time to complete it could save you thousands in accountancy fees. Please see THIS LINK

Also see these related articles:-

How does s162 incorporation relief work for landlords?

Beneficial Interest Company Trusts – Avoid Refinancing When Incorporating

FAQ’s – Beneficial Interest Company Trusts

Landlord Incorporation – The Race Is On



Comments

Simon Misiewicz

11:40 AM, 20th January 2016
About 3 years ago

Hi Mark

You can claim multiple dwellings (averaging) relief so the 4% would not apply.

Warm regards

Simon

Mark Alexander

11:50 AM, 20th January 2016
About 3 years ago

Reply to the comment left by "Simon Misiewicz" at "20/01/2016 - 11:40":

Hi Simon

I thought I'd made that point clear but obviously not clear enough.

The 4% rate would still, of course, still be payable if the AVERAGE property value was £500,000 plus, e.g. 6 property portfolio worth £4 million.
.

Howard Reuben CeMap CeRER

12:02 PM, 20th January 2016
About 3 years ago

Mark, a quick query please - if the property ownership is transferred to a Trust to mitigate against the new tax regime, and then property has a mortgage on it, doesn't the lender have to agree to this new ownership structure, otherwise wouldn't the transfer of ownership be a breach of mortgage Offer conditions? My thoughts are that this can only be arranged with full transparency and the lender and their legal team also agreeing and approving this strategy up front? I ask because I have been approached by a Client who wants to consider this but they are worried about repercussions of what the lender might do 'if they found out'.

Simon Misiewicz

12:06 PM, 20th January 2016
About 3 years ago

Reply to the comment left by "Mark Alexander" at "20/01/2016 - 11:50":

More like I mis-read it. My apologies Mark.

Mark Alexander

12:17 PM, 20th January 2016
About 3 years ago

Reply to the comment left by "Howard Reuben" at "20/01/2016 - 12:02":

Hi Howard

This point is covered at the end of this article >>> http://www.property118.com/avoid-refinancing-landlord-incorporation/82791/

For easy reference I quote (and please don't take offence at this, it is not aimed at you personally) ....

"Beware advice which is biased

The mortgage industry do not like the idea of Beneficial Interest Company Trusts. This is because brokers, lenders and conveyancers all make money out of refinancing. I have even heard it said that use of Beneficial Interest Company Trusts could constitute mortgage fraud. This is farcical and I can assure you that transferring a beneficial interest does not constitute mortgage fraud. I would be very shocked if such advice was provided in writing by a qualified and practising lawyer.

Mark Smith (Cotswold Barristers) advises all clients to satisfy themselves that a transfer of beneficial interests does not constitute a breach of their mortgage conditions. There is no legal requirement to seek permission from a mortgage lender or inform a mortgage lender of the transfer of beneficial interests unless there are specific clauses/conditions in the mortgage contract between the parties compelling a borrower to do so. There are no such conditions in most mortgage contracts. At worst, if such a condition was to exist, and if a borrower was to proceed regardless, the worst case scenario would be that a lender could argue breach of contract if they ever became aware. No crime would have been committed.

For ‘belt and braces’ certainty a borrower, or his/her professional advisers, could write to mortgage lender(s) to declare their intentions and to invite the lender to advise on whether such an arrangement would be in breach of any mortgage conditions, and if so to evidence those conditions. If a mortgage lender does have any T&C’s that would be breached in the event of a transfer of beneficial interests then it would be the responsibility of mortgage lender to evidence that. If the mortgage lender fails to respond in a timely manner, or fails to produce evidence of T&C’s which could scupper the viability of the arrangement, the borrower would be perfectly within his/her rights to proceed.

The above is very different to requesting a lenders permission to proceed, which is what a mortgage broker or an inexperienced conveyancer might do. This is because lenders are perfectly within their rights to deny permission without giving a reason. If mortgage lenders are asked for consent to implement something they do not fully understand then refusal of consent will more than likely be their stock response. This is logical because they cannot be compelled to investigate the legality of every arrangement they are asked to consent to, furthermore it would not be commercially viable for them to seek legal advice on such requests. A complaint could be raised to the Financial Ombudsman Service if consent was withheld unreasonably, however, this could take several months and possible a year or more to resolve. Therefore, alternative mentioned in the paragraph above is preferable."
.

Howard Reuben CeMap CeRER

12:30 PM, 20th January 2016
About 3 years ago

LOL no offence taken but I've never been conjoined with "an inexperienced conveyancer" in any sense before! 🙂

Mark Alexander

12:44 PM, 20th January 2016
About 3 years ago

Reply to the comment left by "Howard Reuben" at "20/01/2016 - 12:30":

LOL - there's a first for everything! 😉
.

Jack Woodberry

22:58 PM, 21st February 2016
About 3 years ago

Hi Mark,

I tend to think Simon might have a point here. My understanding was that selling/transferring from personal to company ownership would fall under 'linked purchases or transfers' - see here: https://www.gov.uk/guidance/sdlt-linked-purchases-or-transfers

And where the properties are residential, I thought we could/should then apply standard residential property rates, subject to multiple-dwellings/averaging relief, as Simon suggested.

Further, since the transactions would not be at 'arms length', I would think linked/connected purchase rules would trump rules for buying 6 or more properties at arms length.

Keen to hear your thoughts.

Kate Mellor

17:26 PM, 11th April 2016
About 3 years ago

I note that you refer to relief for Partnerships when incorporating. Unfortunately this does not apply to Property Investment Partnerships. As far as I can see, it is specifically excluded in SDLTM34010 - special provisions relating to partnerships: Transfer of interest in a property investment partnership. If I've got this wrong please let me know as I really hope I have!

Mark Alexander

20:04 PM, 11th April 2016
About 3 years ago

Reply to the comment left by "Kate Mellor" at "11/04/2016 - 17:26":

Hi Kate

I have referred your question to our accountants and will post their answer in due course.
.

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