Should You Incorporate Your Property Business?

With a Budget expected in a few months, and the expectation that taxes will need to rise, it appears to have been leaked that the Government are considering charging landlords NIC on their net rental profits. This has brought into focus the possibility of incorporating a property business, to counter this. Along with this potential benefit, there may be other benefits from profit being subjected to corporation tax rates, which are lower than income tax rates, and from higher tax relief on mortgage interest. And for those considering succession and inheritance tax, a corporate vehicle gives scope to create a family investment company (FIC). So, if this appeals, can this incorporation be achieved without triggering an immediate tax charge on conversion?

Capital Gains Tax

Incorporating a business is a transfer to a connected party so, prima facia, the disposal price needs to be property market value, which will almost inevitably trigger Capital Gains Tax (CGT) on any paper gain that the property is sitting on. However, assuming all of the property business assets are exchanged for shares in the new company, then incorporating relief should be available and no immediate CGT liability arises. There are some additional conditions attached to claiming incorporating relief on property businesses, including the requirement for your involvement in the business to be active (eg ownership of multiple properties, actively looking to acquire further properties to let; and the letting of property being the property owner’s main occupation),  rather than just a passive property letting.

Stamp Duty Land Tax

Normally, Stamp Duty Land Tax (SDLT) would also be due on the property market value(s) and any mortgages transferred at the date of conversion. Once again, there is a relief to save on this, if an established partnership or limited liability partnership property business incorporates into a company with the same ownership split as when the properties were owned personally. As many landlords have created a partnership, before then incorporating, purely to claim this SDLT relief, then care and proper risk consideration are required here. The longer the partnerships exists and the more formalised it has been operated, the better. These claims may be subject to more HMRC scrutiny.

If you decide to follow this conversion process, if of interest to you, a new FIC company can be established with the different share classes (e.g. freezer shares and growth shares), to bring in your next generation and pass wealth down the family. Although this shifts future value increases out of your estate, you can still maintain control.

It goes without saying that we have no inside knowledge of what tax changes may or may not be announced in the next Budget. However, as there are other potential tax benefits from incorporation, please speak to your local Whitings office or your normal Whitings adviser if you wish to understand how this tax planning might apply and benefit your individual circumstances. We can also explain to you how running a corporate property business differs from owning property personally.

Disclaimer - All information in this post was correct at time of writing.