LBTT for sole owner landlord incorporation in Scotland
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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.
Reasons for transferring your property rental business into a Limited Company
Limited Companies are allowed to offset 100% of their finance cost against rental income as a legitimate business expense. Individual landlords are not
If your property rental portfolio is run along business lines, then you will be entitled to claim ‘incorporation relief’ to roll your property-based capital gains into shares in your limited company
If your business liabilities (e.g. mortgages) are less than your acquisition costs of your property portfolio ‘as a whole, you will pay no CGT whatsoever. Furthermore, an opportunity for *Capital Account Restructuring might apply
The base cost for capital gains tax calculation purposes of properties in your company is uplifted to the market value of your properties at the point of incorporation
If you decide to sell any of your properties, the company will only pay corporation tax (currently 19%) on any uplift in the value of the properties since their value of the day they were acquired by the company
The above provides an opportunity for you to sell poorly performing properties and to replace them with better ones without CGT implications. If you were to do this as a sole owner then CGT would apply to any capital appreciation from the day you acquired the property (plus any improvements you have made which were not treated as an expense against income)
What is Capital Account Restructuring?
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:-
From retained rental profits
From the net proceeds of any property sales
From the net proceeds of any increased financing
Landlord Tax Planning Consultancy is the core business activity of Property118 Limited
We work closely with Scottish solicitors with whom we have completed several transaction of this nature, with full disclosure to Revenue Scotland. The advice and implementation you receive from the Scottish solicitors means that you are fully protected by their Professional Indemnity Insurance.
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