Key takeaways
Incorporation can deliver tax efficiencies
Corporate ownership may reduce income and inheritance tax.
Property transfers require careful planning
CGT and SDLT implications need early consideration.
Corporate structures create IHT opportunities
Business Property Relief may be available through structuring.
Property portfolios face a complex nexus of taxes, which are dependent on how the properties are held and the interplay of Income Tax, Capital Gains Tax (CGT), Stamp Duty Land Tax (SDLT) and Inheritance Tax (IHT) all apply in different ways depending on whether the properties are held by an individual, a partnership or a company.
It is common for clients to hold a property portfolio in personal names, but arguably this attracts the highest rates of Income Tax and CGT and can result in the least favourable treatment for IHT purposes.
Transferring ownership of properties into a company can be an attractive proposition for clients, as the result is usually a lower effective rate of tax on profits, and can create opportunities to achieve 100% IHT relief.
However, the journey from individual ownership to company group structure requires careful consideration of the taxes already mentioned.
The journey to incorporation
If incorporating a company to hold property, the properties must be transferred from the client, as the current owner, to the company.
Any gain from the date of purchase to date of transfer is subject to CGT. However, this CGT can be deferred when properties are transferred from an individual to a company. The CGT liability would then only become payable on a sale of the shares in the future, potentially indefinitely.
Unfortunately, the tax rules are not as favourable for SDLT purposes. Any transfer of properties from the client, as an individual, to a Company will therefore result in an SDLT charge, which could be a considerable tax charge.
The partnership stepping stone
There is, however, relief from SDLT when properties are transferred from a partnership to a company.
It can therefore be worthwhile exploring the possible partnerships options, to see if this is something that can be utilised.
There must be a genuine partnership in which all partners are actively carrying on a business. The transfer of properties from the partnership to the company can be done in a tax efficient way for both SDLT and CGT purposes.
IHT structuring
Whether a property portfolio is held by the client as an individual, a partnership or a company, generally the business of letting properties is not viewed as a trading business by HMRC. Instead, it is seen as a business which wholly or mainly holds investments. As such, there is no relief from IHT on the value of these assets and on death IHT will therefore be payable at the current rate of 40%.
However, a property portfolio owned by a company can create a planning opportunity.
Through corporate structuring a corporate group can qualify for relief from IHT, known as Business Property Relief, if the overall business activities of the group carry out a trade.
The rules relating to the tax treatment of property on incorporation and beyond are not straightforward, but with the right advice planning opportunities can result in significant tax savings, both during lifetime and on death.
Our Wealth Planning and Structuring team advise on capital and income tax planning, international and UK business structuring, taxation of owner managed businesses, the creation and administration of trusts, foundations and corporate entities, compliance, tax enquiries and advising employers and employees on share schemes and tax consequences of international assignments.
Contact us today to discuss how we can support you.
