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Landlords who plan to incorporate their portfolios as limited companies must beware strict eligibility rules and unintended consequences which could prove costly, a tax partner at Azets has warned.
Landlords can take advantage of Section 162 Incorporation Relief which allows them to transfer their properties to a limited company without incurring a Capital Gains Tax or Stamp Duty Land Tax liability at the time of transfer.
For example, a landlord with five rental properties at a total value of £1m, purchased for a total of £800,000, could save £56,000 on CGT alone through incorporation relief as a limited company.
However some consequences of this include the fact that individuals cannot benefit from incorporation relief therefore any landlords who need the rental income to live off should avoid this.
Furthermore, to qualify for incorporation relief on CGT, the limited company needs to be a commercial business.
This typically requires five or more properties that the landlord has owned for at least two years and can evidence managing agent hours and activities.
Stamp Duty relief is also a grey area with a divergence of opinion of eligibility for it.
Azets added that usually landlords need to incorporate as a limited liability partnership, which then needs to conduct the business for a period of time.
While most stamp duty lawyers accept two years, landlords must seek expert advice on this before proceeding.
Therefore, it said incorporation is not a one size fits all scheme for landlords to save on CGT and SDLT.
Rick Schofield, tax partner at Azets, said: “Where a landlord is building a portfolio and doesn’t need the cash immediately, incorporating as a limited company makes absolute sense, but it isn’t straightforward and there are lots of ways to get it wrong.
“There are other considerations, such as knock-on effects for people who are on means tested benefits, including children’s allowance. Unintentional consequences of incorporating can cost landlords a lot of money, so it’s critical to seek professional advice to ensure you optimise your position and can meet all the eligibility criteria for incorporation relief.”
