If you are a landlord in Scotland and you own properties in your own name, you might be considering transferring your rental property business into a legal company.
GOOD NEWS – the LBTT is likely to be a LOT less than you might imagine.
First, if you are transferring more than six properties, there is no 4% ADS to pay.
Second, the commercial rates of LBTT are applied, which are much lower.
Third, Multiple Dwellings Relief “MDR” applies. To calculate this you take the total value of the transactions and then divide by the number of dwellings to determine the average value of each property. You then apply that value to the commercial scale for LBTT. The minimum amount of LBTT payable is 25% of what the commercial rate would have been without MDR.
Note that an HMO or a block of flats could be deemed to contain multiple dwellings even if is on registered on one title!
Here’s a worked example.
8 dwellings with a total value of £990,000.
Commercial rate of LBTT = £38,000
Average value of each dwelling = £123,750.
As the LBTT on the average value of each dwelling falls into the nil rate band the LBTT payable is the commercial rate of LBTT (i.e. £38,000) X 25%.
Therefore, the LBTT payable would be £9,500.
If your rental property business has operated as a Partnership for three or more years the LBTT payable could be £nil. This is because different rules apply for Partnerships.
This is where you increase your business liabilities up to the acquisition costs of your property portfolio as a whole before you incorporate.
This can be achieved using short term bridging finance.
The cash taken out is tax free.
When the incorporation occurs, the bridging finance can be novated to the company along with all other liabilities being adopted by the company as a condition of a Business Sale Agreement. There is no need to refinance any of your existing mortgages, because CGT and LBTT is triggered when missives are completed, not when the completion of the transaction is registered. Accordingly, the missives are drafted to be a long-stop deferred completion contract whereby the completion date is set to be one day prior to the end of each mortgage term, or earlier at the behest of the company.
The cash you withdrew from the business prior to the incorporation is then loaned to the company after ‘substantial completion’ has occurred.
The company uses that cash to repay the short term bridging finance it has taken responsibility for.
The outcome is that the company now owes you money.
On this basis, there is no need for you to declare dividends or to give yourself a salary from the company (both of which would be taxable).
Instead, any spare money the company has can be used to repay the loan it has outstanding to you. These loan repayments are tax free.
There are three ways the company can accumulate cash to repay your Directors loan, as follows:-
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