Costs related to Transferring Ownership to a Limited Company

Transferring ownership to a limited company has become an increasingly popular strategy among buy to let property landlords who own their properties personally. This approach can offer significant tax advantages and certain liability protection. However, the process involves various costs and tax implications that must be considered carefully. This article considers some of the costs involved in transferring property to a limited (LTD) company, providing an overview for landlords contemplating this move.

Understanding the Transfer Process

When you transfer property ownership to a company, you are essentially selling the property to a company that you own. For tax purposes, the sale is assumed to occur at the market price of the property, even if the transaction price was below this price. This approach triggers several financial considerations, including Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT), as well as legal fees and potential mortgage costs.

Stamp Duty Land Tax (SDLT)

One of the more significant costs associated with transferring property to a company is Stamp Duty Land Tax (SDLT) payable by the buyer. When property is transferred to a company, SDLT is typically calculated on the market value of the property, rather than the amount actually paid, known as the chargeable consideration. For example, if a property has a market value of £300,000 but the company only pays a chargeable consideration of £150,000, SDLT is still assessed on the full £300,000 market value.

Moreover, an additional SDLT 5% surcharge applies when the property is classed as an additional residential property, which is commonly the case with buy to let landlord portfolios. The SDLT rate in this situation is 5% on the first £125,000 of a property’s value, 7% on the next £125,000 of its value, 10% on the next £675,000, 15% on the next £575,000 and 17% on its remaining value. However, for properties worth over £500,000, companies may be subject to a flat 17% SDLT rate (unless they can demonstrate that it has been acquired exclusively for a property rental business) and the property may also be subject to an Annual Tax on Enveloped Dwellings (ATED). Given the potential for high SDLT and other taxes, it is important to consult a tax specialist to explore any available reliefs or exemptions that could reduce the purchaser’s tax liability when considering transferring property to a company.

Capital Gains Tax (CGT)

Transferring property to a company may also trigger CGT liabilities for the seller. As the transfer is treated as a disposal at market value, the would be liable for CGT on any increase in the property's value since its original purchase after allowing for certain deductions, such as the original SDLT and buying expenses, any subsequent capital improvement expenses, current selling expenses and your annual CGT allowance.

Legal and Conveyancing Fees

The transfer process involves legal work similar to a standard property sale. Engaging a conveyancing solicitor is necessary to handle the legal aspects, including drafting contracts and ensuring compliance with regulations. Legal fees can vary, costing up to £1,500 plus disbursements, depending on the complexity of the transaction.

Mortgage Considerations

If there is an existing mortgage on the property, transferring ownership to a LTD company requires notifying your lender. An early redemption charge may be applicable if you are on a fixed mortgage rate; it is worth checking this with your lender and optimising the timing of the transfer accordingly to the extent possible. Most lenders will require the company to apply for a new mortgage. Mortgage rates for limited companies are generally higher than those for individual borrowers. Additionally, arrangement fees and valuation costs may apply.

Advantages of Transferring to a Limited Company

Despite the costs, transferring property to a company can offer several potential tax benefits:

1. Corporation Tax Rates: Rental income within a LTD company is subject to Corporation Tax, currently at a rate of 19% for profits under £50,000 and 25% for profits over £250,000, which is notably lower than personal income tax rates, which can go up to 45%. This lower rate can result in tax savings, especially for higher-rate taxpayers with substantial rental income. However, if you pay yourself a dividend from the LTD company, you would be liable for additional personal income tax on this dividend income.

2. Mortgage Interest Relief: Limited companies can deduct mortgage interest costs from rental income in full as a business expense, effectively lowering their taxable profits. This is a considerable advantage over individual landlords, who can now only claim a basic rate tax credit (20%) with respect to their mortgage interest due to Section 24 tax changes. For highly leveraged portfolios, this difference can impact the bottom line substantially and make incorporation far more attractive.

3. Limited Liability: Operating through a company provides personal liability protection, which means directors and shareholders are generally not personally responsible for the company’s debts. This legal separation helps safeguard personal assets, such as your own family home or savings, in the event of financial difficulties or legal claims. For a landlord with multiple properties or a growing portfolio, this added layer of protection can provide peace of mind and long-term security. However, lenders to LTD companies might still seek personal guarantees from the company’s owners.

Potential Disadvantages

While there are benefits, it is also important to consider the potential downsides:

1. Administrative Responsibilities: Running a company involves additional administrative tasks, including filing annual accounts, maintaining statutory records and adhering to corporate governance rules. You will also be required to submit annual returns and corporation tax filings. These tasks often necessitate hiring an accountant, adding to your ongoing operational costs and responsibilities.

2. Higher Mortgage Rates: As mentioned, mortgage rates for limited companies are typically higher, which could impact profitability. Lenders typically view company structures as riskier, which can lead to more stringent lending criteria and higher arrangement fees. Over time, these elevated costs can reduce overall profitability, especially for buy to let property owners with multiple financed units.

3. Initial Transfer Costs: The immediate costs of transferring property ownership, such as Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT) and conveyancing fees, can be significant. These expenses are often payable upfront and may require a large capital outlay before any tax benefits are realised. For many landlords, it can take several years of trading under the new structure to recoup these initial costs through reduced tax liabilities.

Conclusion

Transferring ownership to a company can offer landlords significant tax advantages in the buy to let property sector. However, the process involves considerable costs and complexities. A thorough evaluation of the financial implications based on professional advice is advisable to determine if this strategy aligns with your investment objectives.  

FAQs

Q. Is transferring property to a LTD company suitable for all landlords?

A. Not necessarily. The decision depends on individual circumstances, including the size of your property portfolio, income level and long-term investment goals. Consulting a tax advisor may be important to determine suitability.

Q. Can I avoid SDLT when transferring property to my company?

A. Generally, SDLT is payable on such transfers by the buyer. However, certain reliefs may apply if specific conditions are met. Professional advice is essential to determine what is possible.

Q. Will I need a new mortgage for the property under the LTD company?

A. Yes, most lenders require the company to secure a new mortgage. Be prepared for potentially higher interest rates and arrangement fees.

Q. Are there ongoing costs associated with running a LTD company?

A. Yes, operating a company involves ongoing administrative costs, including accounting fees, annual filing fees and compliance costs. These should be factored into your decision-making process.

Q. How do I start the process of transferring my property to a company?

A. Begin by consulting with a tax advisor and a conveyancing solicitor to understand the implications and steps involved. They will guide you through setting up the company, handling the transfer and ensuring compliance with all legal and tax requirements.