Landlords rush to incorporate, capitalising on lucrative tax relief
Incorporation relief can save £100,000s, but strict eligibility rules apply. Here’s what landlords need to know.
Scores of portfolio landlords are incorporating their property portfolio as limited companies, which could save hundreds of thousands of pounds on Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). However, a leading tax expert has warned that strict eligibility rules and unintended consequences could prove costly.
Section 162 Incorporation Relief is available to UK landlords who incorporate their property portfolio as a limited company. It allows landlords to transfer their properties to a limited company without incurring a CGT or SDLT 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.
According to new research by specialist buy-to-let lender Paragon Bank for Q1 2023, over six in ten landlords planning to buy a new rental property advised that they would do so within a limited company structure.
This follows a 5% increase compared to Q4 2022 and a year-on-year rise of 12% to mark a return to the high reported in Paragon’s PRS Trends report for Q2 2022.
Landlords who intend to purchase as an individual has fallen by 5% since Q4 2022 to 24%. Of those who plan to purchase within a limited company structure, 64% have six or more properties.
Rick Schofield, tax partner at UK top ten accountancy firm Azets, says incorporating as a limited company makes “absolute sense” for long-term landlords looking to build their portfolio. However, he warns doing so isn’t always straightforward and there could be costly consequences for landlords who don’t seek advice.
Rick said: “The first thing a landlord should consider when thinking about incorporating is whether they need their rental income to live off. Individuals can’t benefit from incorporation relief, but in a limited company structure, the company pays tax. If you then need the cash, you must take it by way of dividend and you pay tax again.
“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.
“To qualify for incorporation relief on capital gains tax, 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 – for example, collecting rent, managing repairs, and vetting tenants.
“SDLT is more complex and there is a divergence of opinion around eligibility. Usually, landlords need to incorporate as a limited liability partnership, which then needs to conduct the business for a period of time. This is a grey area and, while most stamp duty lawyers accept two years, landlords must seek appropriate tax advice.
“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.”
Richard Rowntree, managing director for mortgages at Paragon Bank, commented on the current market trends around incorporation by buy-to-let landlords.
He said: “Industry data highlights an increase in buy-to-let mortgages written to landlords operating as limited companies over the past five years, as a growing number seek to minimise the impact of tax policy changes introduced by government in 2017.
“Larger loans are often available to incorporated landlords and lenders typically assess interest coverage at a lower rate for limited company applications. This means that purchasing or remortgaging through a Special Purpose Vehicle (SPV) limited company structure can help to increase the chances of the deal working, something that takes on extra significance when affordability is tightened as we’re seeing across the market currently.”