Incorporating properties into a limited company has become a popular strategy for property owners and investors seeking to enhance their property business in the UK. Whether you are currently operating as a sole trader or part of a partnership running a property business, this approach can offer numerous benefits that may be the answer you've been looking for.
This article explores the advantages and considerations of incorporating properties into a limited company in the UK, including the incorporation process and essential tax considerations.
Understanding Limited Company
A limited company is a separate legal entity that provides its owners (shareholders) with limited liability protection. This means that the shareholders' personal assets are safeguarded in the event of the company's financial difficulties.
There are two main types of limited companies in the UK: private limited companies (Ltd) and public limited companies (PLC). For property incorporation purposes, private limited companies are the most common choice due to their ease of setup and flexibility.
Why Consider Incorporation Into a Limited Company
The limited company structure has emerged as a favoured choice, offering a myriad of advantages that elevate it above traditional business forms.
Here are some of the advantages:
Limited Liability Protection
One of the primary advantages of a limited company is limited liability protection for its owners. The company's legal identity is separate from its shareholders, meaning that personal assets are shielded from the company's debts and liabilities. Shareholders are liable only for money they invested in the company, reducing the risk of personal financial loss.
Upon incorporation of the property into the limited company, it becomes subject to corporation tax on both its rental income and any future capital gains. Corporation tax rates are generally lower compared to personal income tax rates, offering potential tax savings on property rental profits. Property investors can benefit from the significantly lower corporation tax rate, typically ranging from 19% to 25%, enabling them to steer clear of the higher income tax rates, which can reach up to 45%.
Mortgage Interest Relief
Previously, individual landlords were entitled to claim tax relief on mortgage interest payments. However, this relief has been phased out due to Interest Relief Restriction Section 24 and has been replaced with a basic rate tax deduction for individual landlords. Incorporating properties into a limited company allows continued full mortgage interest deduction, which can be a significant tax advantage, particularly for higher-rate taxpayers.
Transfer of Losses
Individual property owners who make a loss on their rental properties may not always be able to offset these losses against other income for tax purposes. In contrast, limited companies can carry forward and offset rental losses against future profits, reducing the overall tax liability of the company. This can be especially beneficial during periods of fluctuating rental markets or when making significant property improvements.
Unlike sole proprietorships or partnerships, limited companies have perpetual existence. Their existence is not tied to the life of the owners or any individual shareholder. Even if a shareholder leaves the company or sells their shares, the company continues to operate and conduct business, providing continuity and stability.
Access to Capital
Incorporating as a limited company offers greater access to capital compared to sole proprietorships or partnerships. Limited companies can raise funds by issuing shares to investors, obtaining loans from financial institutions, or attracting venture capital. This access to capital facilitates business growth, expansion, and investment in new opportunities.
The process of incorporating properties into a limited company in the UK is a crucial step for property owners and investors seeking to maximise the benefits of their property business.
Here is a brief overview of the process involved:
Step 1: Company Name and Structure
The first step in the incorporation process is to choose a suitable name for the limited company. The name should comply with the regulations set by Companies House and must not be identical to any existing company name. Use Company name availability checker to check if the name is available. Once you have selected a unique name, decide on the company's structure, including the number and type of shares to be issued and the initial shareholders.
Step 2: Registered Office
Every limited company in the UK must have a registered office address. This is the official address where all statutory correspondence and legal notices will be sent. The registered office must be a physical address within the UK, and it is not mandatory for it to be the company's main place of business.
Step 3: Directors and Shareholders
Appoint at least one director for the limited company. Directors are responsible for managing the company's operations and making important decisions. The same person can hold both positions of director and shareholder, and there is no requirement for shareholders to be UK residents.
Step 4: AOA and MOA
Prepare the company's Articles of Association (AOA) and Memorandum of Association (MOA). The MOA outlines the company's objectives and its intention to become incorporated under the Companies Act. The AOA, on the other hand, details the internal rules and regulations that will govern the company's operations and the relationships between its members.
Step 5: File Incorporation Documents with Companies House
To officially incorporate the limited company, you must submit the necessary incorporation documents to Companies House. The primary document to be filed is IN01 Form, which includes details about the company's registered office, directors, shareholders, and the company's Articles of Association. There is a filing fee associated with submitting Form IN01, and it can be done online or by post.
Step 6: Issue Share Certificates
Once the company is successfully incorporated, issue share certificates to the shareholders. These certificates act as evidence of their ownership in the company and provide crucial information, such as the shareholder's name, the number of shares held, and the class of shares.
Step 7: Transfer Properties to the Limited Company
With the company officially incorporated, the final step is to transfer the properties from personal ownership to the limited company. This can be achieved through various means, such as selling the properties to the company at market value or exchanging the properties for shares in the company.
It is essential to keep in mind that such transfers may have implications for Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT), so it is essential to seek professional advice to optimise the timing and structure of the transfer.
Tax Considerations When Incorporating Properties Into a Limited Company
When transferring properties into a limited company, it is essential for property investors to be acutely aware of the critical tax considerations associated with this process to optimise tax efficiency and ensure compliance with relevant laws and regulations.
Stamp Duty Land Tax (SDLT)
When you transfer properties from personal ownership to a limited company, one crucial tax consideration is the Stamp Duty Land Tax (SDLT). This tax is levied on property purchases or transfers and is calculated based on the property's value.
When transferring properties from personal ownership, SDLT charges are typically based on the market value of the property at the time of transfer. In addition, the 3% SDLT higher rate surcharge can prove to be a significant obstacle to the incorporation of the property business.
However, if the transfer involves moving the property from a partnership to a limited company as part of a complete business transfer in exchange for shares, there is a potential for SDLT relief. This relief applies to transactions between connected persons for SDLT purposes. Guidance for such transactions can be found in Schedule 15 of the Finance Act 2003, specifically addressing the transfer of chargeable interest from a partnership through the "Sum of Lower Proportions" rule.
To ensure eligibility for SDLT relief, it is of utmost importance that the partnership business is legitimate at the time of the transfer.
Capital Gains Tax (CGT)
When dealing with the disposal of a property, whether through sale or transfer to a limited company, Capital Gains Tax (CGT) comes into play. If a property is transferred into a limited company at its market value, CGT may be triggered.
However, there's positive news for those seeking to defer their CGT liabilities, as Incorporation Relief offers a potential solution. To be eligible for this relief, certain conditions need to be met:
- You must either be a sole trader or involved in a business partnership.
- The transfer of your property must encompass the entirety of your business as a 'going concern.'
- All assets of your business, except for cash, must be transferred to the company.
- The consideration received from the company must be wholly or partly in the form of shares.
A Complete Guide on Incorporation Relief
To explore this relief further, you can find more information on our article
Incorporating properties into a limited company in the UK can be a beneficial step for property investors looking to optimise tax efficiency, protect personal assets, and enhance credibility. However, it is essential to carefully weigh the advantages and disadvantages and seek professional advice to ensure a smooth and compliant transition. By understanding the process and considering the implications, property owners can make informed decisions to secure their investment future.
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