The tax cost of extracting a property from a company

Brought to you by ACCA

Extracting a property from a company back into private beneficial ownership may be a costly affair.

Buying an investment property via a limited company is commonly used to mitigate the impact of s24 finance cost restriction affecting landlords of residential buy-to-lets.

But what happens when you realise this strategy no longer suits you, for example, you decide to gift one of the properties to your child or to live in it yourself. In these and similar circumstances, company ownership becomes unviable.

Extracting a property from a company back into private beneficial ownership may be a costly affair. Tax costs arise both for the selling company and for the purchasing connected party.

Transfer for no consideration

Tax cost for the company

For corporation tax purposes, a taxable capital gain will arise on the company as a difference between the market value of the property at the date of transfer and the cost it was purchased for, adjusted for indexation up to December 2017.

The company will be making a distribution in kind. There are specific rules concerning the legality of such a distribution, determined by the availability of distributable reserves. You can find out more in our guide on this topic in our In Practice August 2018 edition .

Tax cost for the director / shareholder

No SDLT will arise if the property is obtained as of distribution in specie, declared in the form of the asset, where no debt is created. For income tax purposes, the distribution in kind will be taxed at the standard dividend rates.

Example

The following examples from Tolleys have been repurposed for this article – tax rates as at 2018-19. Figures are for illustrative purposes only. 

Property market value 650,000
Cost(200,000)
Indexation  (30,000)
Gain chargeable on company 420,000
Corporation tax at 19%   79,800
Distribution to shareholder650,000
Tax at additional dividend rate 38.1%247,650
Total tax cost (79,800+247,650)327,450
 

Purchase for a consideration

The company may agree to pay the director a bonus covering the cost of the property and associated costs. The grossed up amount will be subject to PAYE and employee and employer NIC, with corporation tax relief on these costs.

If the company lends money to the director to finance the purchase, the amount amounting to the market value of the property may result in an overdrawn director’s loan account and trigger s455 tax.

Anti-avoidance rules introduced in March 2013 mean that this tax cost will apply even if the proprietor repays the loan before the nine months expire, but extracts those funds again shortly afterwards.

The company will pay corporation tax on the gain being the difference between the market value and cost, less indexation.

Unless market rate of interest is paid on the loan, a benefit in kind with employer NIC will arise on the amount of interest, at 13.8%.

SLDT will arise on the amount of the market value of consideration.

Example

The following examples from Tolleys have been repurposed for this article – tax rates as at 2018-19.

In this example, the property extracted is commercial – non-residential stamp duty rates have been used to identify the amount of gross bonus required to fund the transfer. Residential property stamp duty rates would be used in the calculation if the property as residential. Figures are for illustrative purposes only.

Corporation tax on gain 
Property market value    650,000
Cost  (200,000)
Indexation    (30,000)
Gain chargeable on company   420,000
Corporation tax at 19%     79,800
 
Bonus paid to director 
Bonus required  (purchase cost and stamp duty)   672,000
Gross bonus1,267,925
Tax and employees NIC(595,925)
 

Tax cost to the company

Gross bonus1,267,925
Employer’s NIC at 13.8%174,974
Corporation tax relief at 19%(274,151)
Corporation tax on gain79,800
Proceeds from sale received(650,000)
Net cash cost to the company570,200

 

Total net cash cost to the company is £570,200 in case of a transfer for a consideration, compared to the total tax cost of £327,450, if the transfer is carried out as a distribution in specie.

Practical considerations

Apart from cash flow considerations for the business and its director-shareholder, administrative changes are likely to be necessary to complete the process, for example:

  • title deeds may need to be changed and filed at the Land Registry
  • mortgage provider may need to be notified
  • if the property becomes the director’s main residence following the transfer, nominating it as PPR and notifying HMRC may simplify any PPR claim in future