Purchasing properties via a limited company offers numerous tax benefits, from capital allowances to Capital Gains Tax reliefs. Still, it is essential to understand the implications of stamp duty when acquiring such properties for corporate use.
Today, let us explore the fundamentals of stamp duty on limited companies and cover everything from applicable rates to strategies for reducing SDLT liability.
Stamp Duty on Limited Company: When Does It Apply?
Stamp Duty Land Tax (SDLT) is a tax charged by the HMRC on the purchase of land or property in the UK. SDLT applies to both individuals and non-natural entities including companies.
In most cases, the higher rates of SDLT (as shown below) apply to companies under the following circumstances:
- When the value of the property is above £40,000.
- When the interest accrued is not subject to a lease with more than 21 years remaining.
The SDLT rates applicable to companies, based on the value of the property, are as follows:
SDLT Rates for Limited Companies
Purchase Price/Lease Premium/Transfer Value | Resident Corporate Bodies | Non-Resident Corporate Bodies |
|---|---|---|
Up to £125,000 | 5% | 7% |
£125,001 to £250,000 | 7% | 9% |
£250,001 to £925,000 | 10% | 12% |
£925,001 to £1.5 million | 15% | 17% |
Over £1.5 million | 17% | 19% |
However, the SDLT liability calculations can change when the property value exceeds £500,000. In such cases, a 17% SDLT is charged. For example, a company buying a property of £800,000 would pay £136,000 (£800,000 * 17%) in SDLT.
A company qualifying for the relief (discussed below) from the 17% rate or a company buying a residential property as a trustee of a settlement is outside the scope of the 17% charge. Therefore, the above-illustrated higher rates apply instead of flat 17% SDLT charge even if the property's value exceeds £500,000.
For Example,
A company runs a property rental business and buys a property worth £1.6m for the same purpose. As the company is exempt from the 17% rate, the company's SDLT liability would be computed as follows:
SDLT Liability (£) | |
|---|---|
Initial £125,000 at 5% | 6,250 |
Next £125,000 (£125,000 - £250,000) at 7% | 8,750 |
Next £675,000 (£250,000 to £925,000) | 67,500 |
Additional £575,000 (£925,000 to £1,500,000) | 86,250 |
Remaining £100,000 (£1,500,000 to £1,600,000) at 17% | 17,000 |
Therefore, the company would be liable to pay £185,750 in Stamp Duty Land Taxes. If the company was not eligible for relief from flat 17% rate, the SDLT payable on it would be £272,000 (1.6m * 17%).
What is Stamp Duty on Company Share Buybacks & How Does It Apply?
There is a common misconception that stamp duty only applies to property purchases. However, this is not entirely accurate. Stamp duty is also levied on the acquisition of shares in a limited company. Typically, stamp duty on purchase of shares is charged at a rate of 0.5% on transactions exceeding £1,000.
Under Section 690 of the Companies Act 2006, companies are allowed to purchase their own shares without the requirement for an instrument of transfer. This exemption allows for the transfer to be executed without incurring stamp duty liability.
Nevertheless, the company is still obligated to submit a return, known as Form SH03, to the Companies House within 28 days of the share delivery. This form must clearly outline which shares are intended to be retained as treasury shares and which ones are slated for cancellation. Form SH03 is subject to stamp duty as if it were an instrument transferring shares in a sale to the company. Consequently, stamp duty on the acquisition of shares at a rate of 0.5% based on the transaction price.
SDLT Reliefs for Ltd Companies: Strategies to Reduce SDLT Liability
HMRC offers various reliefs to incentivise companies to engage in specific types of businesses, thereby reducing the 17% charge. It is important to note that specific conditions must be met to qualify for these reliefs. Let's look at two conditions where HMRC offers relief to companies from the 17% rate:
Property Rental Business
Suppose a company acquires a chargeable interest solely for the purpose of generating rental income or other receipts as part of a qualifying property rental business. In that case, the standard 17% rate does not apply to the transaction. To qualify for this relief, the following conditions must be met:
- The business must be engaged in property rental business activity.
- The business must be operated on a commercial basis and must aim to make a profit.
Have a look at the example above.
Property Development Trade
Similarly, if a company acquires a property exclusively for the purpose of development, re-development, and subsequent resale as part of a property development trade, it qualifies for relief from the 17% rate. SDLT will be charged at the higher rates applicable to additional dwellings.
Property development trade involves activities such as purchasing, developing, or re-developing land and property for re-sale.
For Example,
A company buys a residential property for £2.5 million to refurbish and resell. If the purchase is part of a genuine property development trade (such as redevelopment for resale), the 17% SDLT rate doesn’t apply. Instead, SDLT is calculated using the standard residential rates (with possible surcharges), as the property is considered part of a development business.
This relief applies because the company’s intention is to develop the property for resale, not just to buy and hold it.
In addition to the reliefs mentioned earlier, there are several other conditions where reliefs from Stamp Duty Land Tax is available to companies.
Is Stamp Duty A Deductible Expense?
Companies have the benefit of minimising their tax burden by deducting various expenses, thereby decreasing their Corporation Tax liability.
Nevertheless, it is crucial to note that not all expenses are deductible solely because they are legally required. Similarly, companies cannot deduct stamp duty expenses from their income for Corporation Tax purposes, but it is considered as part of purchasing the property. It is essential to be aware of this, as incorrectly deducting expenses may lead to penalties and fines imposed by HMRC.
Conclusion
In conclusion, understanding the nuances of stamp duty is essential for companies making property acquisitions or share purchases. Having sound information about applicable rates, available reliefs, and exemptions, companies can make informed decisions to minimise SDLT liability and optimise their tax position.
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Frequently Asked Questions
Yes. Limited companies usually pay higher SDLT rates when buying residential property. These rates are typically above standard residential rates and apply even if the company owns no other property.
The 17% flat rate applies when a company buys a residential property worth over £500,000 and no relief applies. However, this rate can be avoided if the property is used for a genuine rental business or property development.
Yes. SDLT applies even if you transfer property to your own company. In most cases, HMRC calculates the tax based on the market value, not the actual price paid.
Yes, but only in specific cases. Relief may be available for property rental businesses or development trades, which can remove the 17% rate. However, strict HMRC conditions must be met.
Generally, yes. Companies usually face higher SDLT rates and fewer reliefs, while individuals may benefit from options like main residence rules or first-time buyer relief.
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