The government have introduced various methods over the past few years to discourage individuals from owning multiple residential properties, such as implementing an additional 3% Stamp Duty Land Tax (SDLT) on second properties. This applies to both individuals and companies. Furthermore, the introduction of the loan interest relief restriction on residential properties owned personally, which have gradually reduced the tax relief available for finance costs. Should an individual have a high loan to value (LTV) ratio on their portfolio, this could potentially be a factor to motivate them towards incorporation. 

Although the Corporation Tax rate is due to increase to 25% from 1 April 2023 (profit dependant), there are still advantages to incorporating a property portfolio. Owned personally, profits and gains are subject to Income Tax up to 45%, or Capital Gains Tax (CGT) as high as 28%; which if held in a company could allow for any excess profits to be reinvested into either additional properties, improvements or overpaying mortgages. 

Potential issues with incorporating properties include giving rise to a CGT charge personally. This charge would be calculated as if the property had been sold to the limited company at market value on the date of transfer. A second tax charge which can arise is SDLT, which is also based on the market value at the date of transfer and would be payable by the company. 

Incorporation relief 

If a property portfolio is operated as a genuine business for tax purposes and maintaining the business outweighs that of a passive property investor, incorporation relief can be claimed to mitigate the above CGT charge. 

When an entire property portfolio is transferred to a limited company in exchange for shares, the company will be deemed to acquire the properties at their market value on the date of incorporation, which will permit only future growth of the properties becoming taxable on a future disposal. 

Incorporation relief can be highly beneficial for properties held personally which have substantially increased in value over time. 

Stamp Duty Land Tax 

An area which requires careful consideration when deciding whether to incorporate a property portfolio or not, is often guided by SDLT. Whilst incorporation relief can mitigate CGT, an SDLT charge would still be payable on transfer. 

If incorporating from a partnership, this may reduce the SDLT charge to nil, however there are strict provisions and anti-avoidance legislation in place to prohibit a partnership being formed with the sole purpose to mitigate SDLT. 

Annual Tax on Enveloped Dwellings (ATED) 

When a company or partnership owns a residential property with a value in excess of £500,000 from 1 April 2016, an ATED return could be due for submission and a tax charge applicable by the 30 April, should it not fall under an available exemption. The most common exemption being when the property is let to a third party on a commercial basis and is not at any time occupied by anyone connected to the owner. 

For more information on ATED, please view the following article written by Emily Hillier here. 

If you are interested in incorporating your property portfolio or would like more information on the above, please contact me for an informal discussion on how we can help.