Transferring Rental Properties To a Limited Company and SDLT Relief

For property rental business owners looking to transition their portfolio into a limited company, it’s important to understand the timing and legal structuring requirements that affect the process.

One key consideration is the necessity for the property business to have operated as a partnership for at least three years before the transfer. This requirement is closely tied to eligibility for certain tax reliefs, such as Stamp Duty Land Tax (SDLT) incorporation relief, and can significantly impact the financial implications of the transfer.

The Importance of Operating as a Partnership for 3 Years

The primary reason for operating the property business as a partnership for at least three years is to establish a legitimate business arrangement that qualifies for SDLT incorporation relief. The law dictates that only a genuine partnership can benefit from this relief when transferring properties to a newly formed limited company. A partnership must be able to demonstrate that it has been carrying out the business jointly and not simply holding property together.

How HMRC Assesses Partnership Status for SDLT Relief Purposes

To qualify for SDLT incorporation relief, it is essential that HMRC recognises the arrangement as a legitimate business partnership rather than a simple co-ownership of property. HMRC will typically evaluate the following factors to determine whether a buy-to-let landlord has evolved into a partnership operating a business:

• Joint Business Operations: HMRC will consider whether the partners are actively involved in managing the rental business rather than passively collecting rental income. Activities such as advertising properties, managing tenant agreements, repairs, and maintenance indicate active business operations.
• Partnership Agreement: A formal, written partnership agreement outlining the roles, profit-sharing ratios, and responsibilities of the partners supports the legitimacy of the partnership.
• Filing as a Partnership: Regular filing of partnership tax returns (SA800) with HMRC is a key indicator. This demonstrates that the partnership is recognised as a distinct taxable entity.
• Pooling of Resources: The partners must contribute capital, skills, or services to the business, further establishing a collaborative business venture.
• Profit and Loss Sharing: HMRC will check whether the profits and losses are shared among the partners according to the agreed terms.

If these criteria are met, HMRC is more likely to classify the entity as a business partnership rather than mere co-ownership, making it eligible for SDLT incorporation relief.

SDLT Incorporation Relief

Under normal circumstances, when transferring properties to a company, SDLT is payable based on the market value of the properties. However, Schedule 15 of the Finance Act 2003 provides incorporation relief if certain conditions are met:

• The business transferring the properties is a bona fide partnership.
• The transfer is made to a company in which the partners of the original partnership own shares proportionate to their original partnership interests.

If these criteria are satisfied, SDLT may not be payable, as the transfer is treated as the continuation of the same business in a different legal form. This relief can result in substantial savings, particularly for businesses with large property portfolios.

Capital Gains Tax (CGT) Considerations

When properties are transferred from a partnership to a limited company, Capital Gains Tax (CGT) implications must be considered. Ordinarily, transferring properties would trigger a taxable disposal at market value, potentially leading to significant CGT liabilities.

However, incorporation relief under Section 162 of the Taxation of Chargeable Gains Act 1992 may apply if the following conditions are met:

• The transfer includes all assets of the business (excluding cash).
• The business is transferred as a going concern.
• The consideration received by the partners is entirely in the form of shares in the new company.

If eligible, incorporation relief allows the gain to be deferred, effectively rolling it into the base cost of the shares issued. This deferral can eliminate immediate CGT liabilities, making the transition more financially manageable.

Benefits of Owning Rental Properties Through a Limited Company

For many property investors, moving their portfolio into a limited company structure offers numerous advantages:

1. Tax Efficiency

• Corporation Tax Rate: Profits generated by a limited company are subject to corporation tax rather than personal income tax. Corporation tax rates are generally lower than higher rates of income tax.
• Dividend Flexibility: Shareholders can choose when and how to draw income through dividends, offering more control over tax liabilities.

2. Retained Profits for Growth

A limited company can retain profits within the business, enabling reinvestment into new properties or business expansion without incurring additional personal tax charges.

3. Inheritance Tax (IHT) Planning

Shares in a limited company can be structured to facilitate inheritance tax planning. For example, different classes of shares can be issued to family members as part of a broader estate-planning strategy.

4. Limited Liability Protection

Operating through a limited company provides limited liability protection, meaning the shareholders’ personal assets are protected if the company faces financial difficulties.

5. Professional Perception

A limited company structure can enhance the credibility and professional standing of the business, making it easier to secure financing or partnerships.

How a Law Firm Can Assist Rental Property Landlords

Navigating the transition from a partnership to a limited company is a complex process that requires careful planning and legal expertise. A law firm specialising in property, business and tax law can offer essential services to ensure the process runs smoothly (note that this list is not exhaustive):

• Establishing and Formalising Partnerships: A law firm can draft and review partnership agreements to ensure they meet legal requirements and demonstrate the business’s legitimacy.
• Tax Compliance and Filings: Legal professionals can help ensure that partnership tax filings are compliant with HMRC regulations, reducing the risk of disputes.
• Incorporation Process Guidance: A law firm can guide landlords through the incorporation process, ensuring the correct documents are submitted and that the transfer of ownership is legally binding.
• Corporate Matters: The Companies Act 2006 requires the completion of board minutes to include approvals of the transaction and which the company should retain at the company’s registered office. The authority of the company and its directors’ powers, under the company constitution also need to be checked against the planned transfers.
• Conveyancing Documents: Property transfers, including the primary transfer deed(s) and any associated agreements are a must. These documents must be drafted to clearly define the terms of the transaction and comply with all relevant legal requirements and checked against relevant mortgages, charge documents and any land registry title restrictions.
• Eligibility for SDLT and CGT Reliefs: Legal experts can assess eligibility for incorporation reliefs and help maximise tax efficiency by ensuring compliance with the necessary conditions.
• Structuring Shareholdings: For landlords looking to involve family members or business partners, a law firm can advise on how to structure shareholdings to meet financial and estate-planning goals.

By working with legal professionals, rental property landlords can mitigate legal and financial risks, streamline the transition process, and focus on growing their business within a more tax-efficient framework.

Conclusion

Transferring properties from a partnership to a limited company can offer significant long-term financial and operational benefits, but the process must be handled carefully to maximise tax reliefs and avoid unnecessary liabilities. Ensuring the partnership has been established for at least three years is crucial to qualifying for SDLT incorporation relief. Additionally, understanding the CGT implications and benefits of company ownership can help property owners make informed decisions and build a more tax-efficient business structure. Consulting with legal and tax professionals is highly recommended to ensure compliance and optimise outcomes.

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Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.