I have been asked by several people over the last few months whether a Deed of Trust could be used to move the ownership of a property into a limited company and whether this would be beneficial. The purpose of these notes is not intended to put people off doing this but to make sure they consider all of the pro’s and con’s before undertaking this form of tax planning.
The answer to this question is that there are several issues which need to be considered:
- In order to qualify for stamp duty land tax (SDLT) relief the property must be gifted to the company. This means that no consideration can be received for the transfer of the property to the company. The one area where this causes problems is where the property has been mortgaged and the mortgage is part of the transfer to the company. In this case the company is taking over a personal liability of the person who owned the property and the value of the mortgage is subject to SDLT. Accordingly where a property is subject to a mortgage as most are then SDLT is not fully avoided.
- Even though the property is being gifted to the company this transaction may still be subject to Capital Gains Tax (CGT) at the time of the drafting of the Deed of Trust. The rules for qualifying for relief from CGT are dependent upon tests which have been outlined in case law. The main case for this is Ramsay v HMRC 2013 in which the taxpayer won because they operated their property as a business and there are important points connected to why they won.
In this particular case the taxpayer worked for a large part of the week managing and maintaining the property. Then together with this the taxpayer had no other income. These are the two main points which HMRC will refer to when they challenge the incorporation of the property business. It is important to be certain that you can meet all of the tests outlined by the judges in this case if you are to be successful in avoiding CGT on incorporating your business.
- You should also be aware that moving the properties into a limited company either through a Deed of Trust or by actually transferring them will not be cheap and defending a claim by HMRC that incorporation relief will not apply is not going to be cheap either.
- Assuming you are successful in moving the property from your personal ownership to a company then both the income and any capital gain will be taxed in the company. The reason for this is because the Deed of Trust moves ownership from you to the company. You are simply a nominee acting on behalf of the company.
The next issue arising from this is how do you get the income and possibly the gain out of the company and into your hands. There are three main ways:
- Salary – this is expensive in tax terms because you incur national insurance both personally and on the company which equates to 25.8% of the gross amount paid.
- Dividends – Since 6 April 2016 this has become more expensive with the increase in the personal tax charge on dividends. The effect of the change is that the first £5,000 of dividends are taxed at 0% then any dividends falling into the basic rate tax band (i.e. earnings up to £43,000) are taxed at 7.5%, those falling into the higher rate tax band (i.e. earnings between £43,001 and £150,000) are taxed at 32.5% and for those falling into the additional rate tax band (i.e. earning over £150,000) they are taxed at 38.1%.
- Loan from the company – this may seem attractive but it is taxed as a benefit in kind on you and the company has to ‘lend’ 32.5% of the amount you borrow to HMRC. Plus a loan does not qualify as income if you are looking to raise a mortgage yourself.
Hopefully by now you will realise that this is not as simple a matter as the popular press or most of the online adverts suggest. The main things to do are:
- Decide what your long term objectives are for holding property.
- Calculate what the ongoing tax cost under the new regime will be and then compare that with owning the property through a company. In doing this also consider the CGT costs as well as the income tax costs.
- Get professional advice from someone who knows what they are talking about.
Reynolds and Co can help you with all aspects of property tax advice.
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