How Can I Transfer Personal Property to a Business?

If you own a property and are considering transferring it to a business, such as a limited company, you’re not alone.

Many landlords and property owners are exploring this option, especially after recent changes to tax rules that have made owning property through a limited company more attractive.

This blog will explain how you can transfer your property to a limited company, the benefits and drawbacks of doing so, and what you need to consider before making the move.

Why Transfer Property to a Limited Company?

How to Transfer Property to a Limited Company

There are several reasons why transferring your property to a limited company might be a good idea:

Tax Benefits:

In April 2020, changes were made to income tax relief for landlords, which have pushed many into higher tax brackets.

As a result, more landlords are paying up to 40% income tax on their rental income. By transferring your property to a limited company, you would instead pay corporation tax on your profits, which is currently 19% – much lower than the higher rate of income tax.

Use of Equity:

If you have built up equity in your property, you can use this as a deposit for your limited company purchase. This could be recorded as a director’s loan, meaning you can claim back the amount later, helping you avoid having to find a whole new deposit.

Long-Term Financial Planning:

Transferring your property to a limited company can also help with long-term financial planning. It may allow you to manage your personal tax liabilities more effectively, especially if you own multiple properties.

The process of transferring your property to a limited company is similar to a standard property transfer, but there are a few key differences to be aware of:

The Process:

You will need to follow the usual steps involved in transferring property, such as instructing a solicitor, conducting property searches, and completing the necessary legal paperwork.

Legal Requirements:

When transferring your property, you will likely need to pay legal fees, stamp duty, and possibly capital gains tax. It’s important to get a clear conveyancing quote that includes all these costs, so you know exactly what to expect.

Mortgage Considerations:

If you have an existing mortgage on the property, you may need to pay it off before transferring the property to your limited company. There could be early repayment fees to consider.

Additionally, if you need a new mortgage under your limited company, you may find that interest rates are higher and the lending criteria are stricter.

Tax Implications of Transferring Property to a Limited Company

Understanding the tax implications is crucial when transferring property to a limited company:

Stamp Duty Land Tax (SDLT):

When you transfer a property to a limited company, SDLT is usually calculated based on the property’s full market value, not the price you sell it for, even if that price is as low as £1.

For properties worth over £500,000, corporate bodies are charged 15% SDLT, although there are some reliefs available for property businesses that meet certain conditions.

Capital Gains Tax (CGT):

Even if you transfer your property to your limited company at a low price, you may still need to pay CGT. This is because, as a director of the company, you’re considered a “connected person.”

It’s essential to speak to a tax advisor before proceeding to fully understand your tax liabilities.

Dividends and Income Extraction:

If you take rental income out of the company as dividends, you’ll need to consider the tax implications. While there is a £2,000 tax-free allowance for dividends, anything above that could be taxed at a higher rate, which is currently 33.75% for higher rate taxpayers.

Ownership and Control of the Limited Company

You might wonder if you can still control your property after transferring it to a limited company. The answer is yes:

Transferring to Your Own Company:

You can transfer your property to a limited company that you fully own and control. Even if you’re the only shareholder and director, your limited company is treated as a separate legal entity, so you remain in control of the property through the company.

Dormant Companies:

Your limited company doesn’t need to be actively trading to own property. Companies that don’t trade are considered “dormant” by HMRC, and they can remain dormant indefinitely.

However, as a director, you still have to fulfil certain administrative duties, like filing annual accounts, to keep the company in good standing.

Legal and Administrative Considerations

When transferring your property to a limited company, there are several legal and administrative factors to consider:

Solicitor Requirements:

Whether you’ll need one or two solicitors depends on how your limited company is structured. If you’re the sole director and shareholder of the company, a single solicitor may be able to handle the entire process.

However, if there are other directors or shareholders, you may need separate solicitors to avoid any conflicts of interest.

Administrative Burden:

Owning a property through a limited company comes with additional administrative responsibilities. Even if your company is dormant (not actively trading), you’ll still need to file annual returns and accounts with Companies House.

Failing to meet these obligations can result in penalties, fines, or even having your company struck off the register.

Disadvantages of Owning Property Through a Limited Company

While there are benefits to transferring your property to a limited company, there are also some drawbacks to be aware of:

Mortgage Limitations:

If you have an existing mortgage on the property, transferring it to a limited company can be complicated. You may face early repayment fees, and any new mortgage you take out under the company is likely to have higher interest rates and stricter lending criteria.

Administrative Costs and Responsibilities:

Managing a limited company involves ongoing administrative tasks, such as filing tax returns and annual accounts. You may need to hire an accountant to handle these tasks, adding to your costs.

Tax on Dividend Extraction:

If you take rental income from the company as dividends, you’ll need to consider the tax implications. While there’s a £2,000 tax-free allowance for dividends, anything above that could be taxed at a higher rate (currently 33.75% for higher rate taxpayers).

This could reduce the overall financial benefit of owning property through a company.

Conclusion

Transferring your property to a limited company can offer significant tax benefits, especially in light of recent changes to income tax relief for landlords.

However, it’s not a decision to be taken lightly. The process involves several legal and tax considerations, and there are both advantages and disadvantages to weigh up.

Before making any decisions, it’s essential to consult with legal and tax professionals to ensure that this move is the right one for your financial situation.