Incorporation of a property letting business
If you own a property letting business through a partnership (or could following a re- structure) you should consider incorporating the business. In addition to the commercial bene ts incorporation can also be advantageous from a tax point of view.
Where the relevant conditions are met it is possible to claim incorporation relief on the transfer of the business to the company.
The effect of this relief:
i. Gains arising on the transfer of chargeable business assets to the company are “rolled over” against the cost of the shares.
ii. The assets in the new company benefit from an uplift to market value such that an immediate disposal by the company should be tax free.
iii. Stamp duty land tax can be mitigated.
GUIDANCE FOR BEING QUALIFIED AS A PROPERTY LETTING BUSINESS
To be eligible for incorporation relief, the property portfolio must also qualify as a property letting business.
The following are important factors to consider:
The size of the building and the number of properties;
Whether a significant role is taken in the conversion and refurbishment of the properties;
The extent to which there is day to day property management activities, such as meeting tenants, arranging building insurance, regular repair work etc;
The degree of activity;
Whether the activity is a serious undertaking earnestly pursued or a serious occupation;
The continuity of the activity;
You operate a property business via a partnership and incorporate your business by transferring all of the assets in return for shares (assuming the only assets are property). The properties are valued at £100k at the date of transfer.
In exchange for the transfer of the properties you receive 1,000 x £1 ordinary shares in the new company ABC Ltd with a market value of £100k.
Assuming the properties were originally acquired for £40k, the properties transferred to the company have an inherent gain of £60k (£100k − £40k).
Incorporation Relief is given automatically. This means there is no Capital Gains Tax to pay on the transfer of the properties to the company.
When the properties are transferred to the company the base cost of the properties are uplifted from £40k (original cost) to the current market value of £100k. This helps reduce the capital gain realised by the company should it sell the property in the future.
The base cost of the shares for tax purposes is £40k - this is the amount that can be deducted. This is because the inherent gain on the properties transferred is deferred by ‘rolling over’ that gain into the cost of the shares, i.e. £100k− £60k = £40k.
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