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  • Katherine Bullock

A Sherpa’s guide to incorporating a property business

Incorporating a property business is something that most practitioners face at some point in practice. From a tax perspective, care is needed to ensure that the costs – typically CGT and SDLT - do not outweigh the potential benefits. Here is a short heads up; I have written more extensively in the second edition of the FCTC Digest. (Out on Friday)

"care is needed to ensure that the costs do not outweigh the potential benefits…"

Putting to one side the possibility of incorporation relief, the tax position on incorporation for an individual landlord may be a liability to CGT on the market value of the property at up to 28% to be paid within 30 days of completion and an SDLT liability at up to 15% with little scope for the tax reliefs available to other trades and businesses. Property partnerships are a subject in themselves and the subject for another post, but it is worth noting that an appropriate partnership may be incorporated tax and SDLT free.

Partnerships can be difficult to spot, although the following factors are helpful indicators:

  • a partnership agreement or deed (although a partnership agreement does not a partnership make)

  • intertwined property such as shared names on deeds, sharing both capital and rent, shared bank accounts.

  • a business undertaken with a view to profit.

Indicators of a business for both an individual and a partner include working for 20 or more hours a week on the business (Ramsay [2013]) and conducting your affairs according to recognised business principles. It is also helpful if the business is the landlord’s sole occupation.

The advantage of establishing that there is a business is the availability of incorporation relief under TCGA 1992 s.162. To qualify for that relief, three main criteria must be met by the landlord. Firstly, they need to transfer a business that is a going to concern to a company. Secondly, the whole of the business assets, minus cash, must be transferred to the company. Thirdly, the transfer must be in exchange wholly or partly for shares issued by the company to the person transferring the business. The relief is mandatory (ie you do not need to elect), but you can opt out.

What exactly is a going concern for these purposes? In my view, it boils down to whether what passes on incorporation is a functional, active and autonomous business or a collection of unrelated and inert assets which leave the company with no ability to direct the business. It is critical that the company continues the business after the transfer and advisable to avoid any drastic or sweeping reforms and changes in the time immediately after the incorporation. Contracts of employment with the new company for the previous owners of at least 20 or more hours a week may also evidence the ongoing nature of the business.

Transferring the whole assets of a business requires the landlord to carefully consider what, and if so when, properties have been withdrawn from the partnership prior to incorporation.

To the extent that the consideration given for the properties is not wholly shares, CGT may be payable on the balance outstanding. This means carefully consideration must be given to any outstanding mortgages. Debts paid off on incorporation may be viewed as consideration other than shares and taxed accordingly. The ideal solution – easy for a barrister to say - is that the loans be novated to the company. In practice this may be difficult to do or unpalatable to lenders; a solution will be needed to be negotiated at the risk of arrangement fees and increased interest rates. In my experience, this becomes most acute where multiple lenders are involved.

Which brings us to SDLT. Ordinarily a sale from a connected person (the landlord) to a company attracts SDLT as if the sale were made at market value. SDLT may be mitigated on incorporation, where you fall within the relief granted by Schedule 15 of the Finance Act 2003. Sch. 15 provides relief for a sale from a partnership to a company in certain circumstances. This is not an exemption, but a formula which, provided the criteria are satisfied, returns a tax charge of zero. In short (and please mind the bear traps), provided that SDLT was paid on the properties when they were purchased by the partnership, and that the partners are connected with each other and the company, the SDLT to be paid works out to 0%. Consideration of the connection test for these purposes can be helpful in securing the relief where, for example, where individuals must act together to exercise control. If Sch.15 does not apply, all is not lost; other options may be available to mitigate SDLT such as using Multiple Dwelling Relief to use multiple lower rate tax bands, or making use of the fact that transferring more than six properties allows them to be taxed as non-residential properties instead, with a lower rate of tax.

Care is required. This is an area where anti-avoidance legislation is prevalent with surprisingly few limits on when HMRC may apply their powers. Whilst this may leave the familiar routes precarious to the irregular traveller, the use of a guide can secure the successful outcome that has been enjoyed for many years.


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