A corporate vehicle offers fantastic tax savings for buy-to-let landlords who would otherwise be subject to higher or additional rate taxation on their property investment portfolios. In the current high personal tax climate for landlords, companies offer a potential way to reinvest profits from investment properties for the benefit of growing the property investment company by acquiring additional properties in a low-tax environment.
However, if a landlord were to put their investment properties straight into a Ltd company, without using any sort of partnership, the capital gain (i.e., the difference between what you bought the property for and what the property is worth on the date of transfer) on the property will crystalise and be subject to Capital Gains Tax. Furthermore, the buyer, i.e., the Ltd company, is also subject to a Stamp Duty Land Tax on the market value of the property (not the outstanding mortgage value as with properties gifted between individuals with a mortgage fixed on the property). Therefore, landlords wanting to do the straightforward transfer of their investment properties into a Ltd company have to be mindful of this double-whammy tax hit on their properties.
There is a way to potentially mitigate these punitive tax charges. If the criteria are met for the partnership to be a ‘trading business’, the partnership can be an extremely useful tool to incorporate a rental property held by an individual landlord into a corporate vehicle without paying either Stamp Duty Land Tax or Capital Gains Tax. Unfortunately, however, the definition of a ‘trading business’ is not defined in law. Therefore, careful case-by-case advice should be sought to ensure that the partnership meets the various conditions set-out in case law to ensure that the partnership meets the definition of a ‘trading business’ in order to benefit from this generous incorporation relief tax savings.
In a nutshell, the two key benefits of doing an incorporation of an existing trading partnership are: Stamp Duty Land Tax and Capital Gains Tax.
In most cases, after accounting for SDLT, CGT and the professional costs of transfer, the tax advantages of incorporating the investment properties into a company will nonetheless make incorporation worthwhile. However, depending on the individual Landlord’s circumstances the costs will exceed the benefit. Even if the partnership is never incorporated into a company, for higher and additional rate taxpayers, the partnership still enables individual landlords to benefit from the full interest expense deduction for the rental properties in the partnership at the very least.