How can you incorporate your property business in a tax-efficient way?

investment property

Landlords are currently facing a challenging landscape, causing many to reconsider their decision to remain in the industry. If you plan to continue as a landlord, you may now be considering incorporating your property business.  This could deliver some financial and tax advantages. But how can you incorporate your property business in a tax-efficient way?

As we have previously discussed there are tax issues when transferring your rental business to a limited company. But is there a way around it?

A possible solution could involve forming a partnership related to your property first before you incorporate your property business.


What is a property partnership?

In its own guidance, HM Revenue & Customs (HMRC) clearly anticipates that a partnership need not only be a trading partnership. It can also be an investment business.  However, the guidance goes further to state it is unlikely that a property partnership exists where a group of joint owners just let out a property.

If you own a property jointly, say with your spouse, chances are you will not count this as a property partnership.  You are unlikely to be completing a partnership tax return.

It’s common to calculate the profit (or loss) for the period and divide it equally between you and your spouse, and then each of you would complete your own tax returns.

It should be something more substantial than that if a property partnership is going to operate.  To operate as a property partnership there must be “sufficient organisation”.


Organising your property partnership as a business partnership


HMRC would expect to see a business partnership for properties to have many of these features:

  • Operate a partnership bank account
  • Contracting with the utility companies in the partnership name
  • Issue rent demands in the partnership name
  • Have a partnership agreement
  • Prepare partnership accounts
  • Prepare partnership tax returns
  • Record major partnership decisions

These are common features of most business partnerships.

When you start operating your property partnership one of the key ingredients is that the property partnership exists as a business. This is not a straightforward issue as it would first appear.

There also needs to be sufficient activities carried out by the partners in the business.  In other words, you need to clearly demonstrate what each partner brings to the table for the property business.

Since the Ramsay v. HMRC case in 2013, it is widely accepted that 20 hours a week is sufficient to class as active hours for the business.  So, what do those activities look like? Some examples are repairs, maintenance, looking after common parts, carrying out credit checks for new tenants, checking inventory, drawing up tenancy agreements etc.

If you have an agent managing the property for you it is unlikely that that you’ll meet the 20 hours a week requirement.


Tax implication of transferring your property to a partnership

When you transfer a property into a partnership the legal ownership does not change. What was owned before is owned afterward so a disposal has not taken place.  So, there are no implications for Capital Gains Tax (CGT).

For Stamp Duty Land Tax (SDLT) there is a relief from charge where a person transfers a chargeable asset into a partnership and receives an interest in that partnership.

In essence, there are no tax implications when transferring a property from oneself personally to a business partnership.


Transferring property from a partnership to a Limited Company

Once you have been operating as a partnership for a while then you can transfer the property into a limited company and obtain capital gains tax relief.  This relief is commonly known as incorporation relief.

Incorporation relief enables you to postpone any potential gain and CGT until further disposal.

It’s worthwhile noting that transferring the property from a partnership to a limited company will attract SDLT.  If the transferors are connected parties, there is an exemption available, but the property needs to have been held in the partnership for at least three years.  There is no time limit specified in the legislation, but some commentators have suggested an interval of three years works.


Capital Gains Tax relief on incorporating the property partnership

The CGT relief referred to as “incorporation relief” is available if there is a business in operation.  You’d need to transfer the property into the company as a going concern in return for shares in the new company.

Full details of this relief can be found here.  The relief is given automatically.

If you have multiple properties in the partnership you must transfer all of them at the same time as all assets with the exception of perhaps cash needs to be transferred.

Any capital gains on the transfer of the properties will be deferred until any future sale of shares.


What should you do next?

As we’ve said earlier these are tricky times for many landlords.  There are a lot of questions out there.  The pain associated with interest restrictions was bearable when interest rates were low but that is no longer the case.

Several landlords are currently contemplating whether to sell their properties and report the Capital Gains Tax (CGT) or continue being landlords. For those choosing to stay in the business, is incorporating the best approach to minimise tax exposure?

These questions require serious consideration and discussion. If you’re working with us, please contact your regular manager to delve deeper into the topic and work towards finding a solution. Let’s have a serious conversation.

If you are not working with us but would like our help see how we work