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Incorporation of a property rental business

Do you own a rental property portfolio in your personal name? If yes, you may want to consider transferring this to a Limited company.

Depending on your individual tax circumstances, there may be significant Income tax benefits in doing so.

Save Income tax by transferring to a Limited company

Property owners are no longer able to fully claim mortgage interest, or any other property finance, as tax-deductible from their rental income.

If you are a higher rate tax payer (or near the higher rate tax band of £50,000) then this could have a significant impact on you.

If the properties are held in a Limited company, all the interest would be tax deductible AND the net rental income would only attract a 19% tax rate.

Is there Stamp Duty Land Tax (“SDLT”) or Capital Gains Tax (“CGT”) payable when incorporating a rental business

As a general rule, the Limited company would incur SDLT for any properties transferred to it and the landlord would incur CGT on transfer of the properties to the Limited company.

However, SDLT and CGT can be eliminated/deferred in certain circumstances e.g., by running a rental property portfolio as a business via a partnership and dedicating at least 20 hours per week in doing so.

What about Inheritance Tax (“IHT”)

If you own these rental properties personally then yes, you will typically have to pay inheritance tax on buy-to-let properties.

With careful planning, you may be able to mitigate this via incorporation of the rental business. Rental companies could attract “Business Property Relief” by demonstrating elements of trading e.g. property development.

Is there anything to watch out for in incorporating a rental business?

If your existing properties are subject to mortgages, then these will need to be redeemed and new mortgages taken out in the name of the Limited company. There will be a cost associated with this.

There are restrictions on how the cash that is generated in the Limited can be taken out for personal use. This can be managed by forward tax planning.