Incorporation Tax Relief no longer advantageous?

for letting companies

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I had an enquiry this week from a potential client.

He was asking if he could put his HMO rental property into a limited company and then sell it on the open market as opposed to selling it directly as a sole trader - hence paying tax at the CT rate instead of higher rate personal tax.

The property is worth about £310k and he bought it many years ago for around £30k, so quite a substantial capital gain.

However, with the CT Rising to 25% plus the stamp duty and then the issue of the director withdrawing the funds, I can't see the advantage - in fact the opposite.

He also has 6 other flats, am I right in thinking he would need to transfer all the properties into the company in order to obtain the relief?

This is not something I have had much experience in, so possibly missing something and would apprecaite your thoughts - polite ones please!

Replies (12)

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By Mr_awol
09th Mar 2023 11:06

Even if he could incorporate without a CGT liability (I'm not saying he can) and even if he could avoid SDLT (which he almost certainly cannot) what would be the point of incorporating it to sell, even under the old regime?

Sell it now for £310k less £30k less £12k = £268k taxable at max 28% = £75k.

Incorporate it with full relief and sell for £310k at 19% CT = £59k leaving £251k of cash in the company. Wind it up and deduct rolled over base cost of £30k and AE of £12k you have a chargeable gain of £209k which will be taxed at max 20% = £42k. Total corporate and personal taxes £101k.

The increase in CT costs another £20k or so overall but it would always have been a daft idea in the first place, wouldnt it? You were never going to get BADR on it, on either trading status or ownership period of the shares.

And if you put all the remaining units in (to try and get incorporation relief, which may or may not work) then you cant get the cash out from the sale of property one anyway. You may be able to pay down borrowing on the others, if that's what you'd have used it for when selling personally, although if there are loans on any of these then it's a whole new minefield anyway.

I might be the crazy one here but whilst i can see some potential advantages to incorporating a property portfolio (with some pretty hefty risks attached) doing it immediately prior to sale seems complete madness even before you get into Stamp Duty, increased CT rate, professional fees, etc.

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Replying to Mr_awol:
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By Justin Bryant
09th Mar 2023 11:26

"Incorporate it with full relief and sell for £310k at 19% CT = £59k"

"doing it immediately prior to sale seems complete madness"

Eh? Surely CT = £nil, so it's far from madness.

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Replying to Justin Bryant:
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By SJRUK
09th Mar 2023 11:38

Of course, I wasn't thinking straight about the CT !
The CT would be nil as its transferred at current market value. So I see key points as:-

a) If he wants to withdraw the funds immediately and if so Dividends? As he can't close the company anyway due to other properties !
b) Having to transfer all of the portfolio into the company and the resulting stamp duty
c) Whether the portolio actually qualifies as a "property letting business" as indicated by Stepurhan.

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Replying to Justin Bryant:
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By Mr_awol
09th Mar 2023 11:53

Justin Bryant wrote:

"Incorporate it with full relief and sell for £310k at 19% CT = £59k"

"doing it immediately prior to sale seems complete madness"

Eh? Surely CT = £nil, so it's far from madness.

You are quite right - i think i got caught up in the question that was asked and didn't step back to consider the position properly from scratch.

As a point of record and to try and pull back some dignity I first saw your reply about ten minutes prior to the expiration of my edit period and in honesty I very nearly made a ninja edit avoid looking stupid - but then figured that was pretty poor form and it would be better to just take it on the chin. It's also a blazing advertisement as to why people should not rely on responses to questions on this forum......

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Replying to Mr_awol:
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By Justin Bryant
09th Mar 2023 12:08

Relax (better than the morons here who never accept they're wrong)!

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Replying to Justin Bryant:
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By Tax Dragon
09th Mar 2023 16:20

Said without the slightest hint of irony.

(Shame, because I love a good irony, me.)

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Replying to Tax Dragon:
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By Justin Bryant
09th Mar 2023 18:05

I knew some (highly predictable) moron like you would be along soon to say just that!

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Replying to Justin Bryant:
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By Tax Dragon
09th Mar 2023 18:25

You cross, I'll head.

Glad for once I didn't miss. (Credit to the quality of the cross. And nice to be on the same team for once.)

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Stepurhan
By stepurhan
09th Mar 2023 11:13

First question is whether he has a property letting business, or whether he is simply receiving rental income. Incorporation relief is only available if he has a property letting business. I'm not convinced 6 flats and an HMO will qualify for that, but you will know more detail to make that call.

Even if he has a property letting business, it is likely to consist of his entire portfolio. I very much doubt he would be able to transfer over just the one property. If they don't want to transfer the whole portfolio, it's a non-starter.

Only if both of the above hurdles are overcome should you look at whether having the property in the company will be cheaper based on his future plans to sell/access the sales funds.

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Replying to stepurhan:
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By richard thomas
09th Mar 2023 14:57

I do not see why owning and managing a single property should not constitute a business by itself - that was the case in the only binding (Upper Tribunal) authority on this issue (Elizabeth Ramsay v HMRC).

Whether s 162 requires a transfer of the entire business is not entirely clear, nor whether there are here two or more businesses.

And in response to Mr_awol, why would BADR not be available?

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Replying to richard thomas:
Stepurhan
By stepurhan
09th Mar 2023 15:05

I didn't say it was impossible, I just thought it unlikely. The property in Ramsay was an apartment block. An HMO implies a much smaller, and thus simpler to manage, property.

As I said, it is up to the OP, who will have full details of the portfolio, to determine if it could be considered a business.

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Replying to richard thomas:
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By Justin Bryant
09th Mar 2023 15:07

BADR is only available on FHLs. The whole property business must be transferred. See:
https://www.legislation.gov.uk/ukpga/1992/12/section/162/enacted

You're probably technically right re Ramsay (with a sensible, intelligent judge, so possibly not in practice!).

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