- Companies are an effective tax shelter for those who wish to use their rental income to purchase new properties due to the low rates of corporation tax in comparison to income tax.
- Shares are usually easily transferable, for those who wish to transfer a share in the business but not whole properties.
- Shareholders benefit from the company’s limited liability.
- Companies are not affected by the withdrawal of relief for finance costs.
And some potential disadvantages are:
- Gains from property sales may be taxed twice, first within the company then when the investor sells their shares or withdraws funds.
- Taxpayers with low levels of income may pay more tax investing through a company, as profits are taxed within the company before being distributed to shareholders.
- UK companies are subject to more administrative requirements than individuals, and have to file financial statements and information on shareholders with Companies House.
The two main tax considerations on incorporation of a residential lettings business are Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT):
A transfer from an individual to a company will be subject to SDLT on the market value. A transfer from a partnership to a company will incur a nil SDLT charge, however partnerships formed specifically to avoid SDLT will fail to do so due to anti-avoidance rules.
If a number of dwellings are being transferred to the company it may be possible to claim multiple dwellings relief or pay SDLT at lower non-residential rates.
Because the transferor and the company will be connected, properties are deemed to be transferred to the company at market value. However, it is frequently possible to use incorporation relief to defer any capital gains by rolling gains into the shares issued by the company, so that they will only crystallise on the disposal of those shares. Incorporation relief is available where:
- a person who is not a company, transfers to a company, a business as a going concern;
- the business is transferred together with the whole assets of the business, or the whole of the assets apart from cash; and
- the business is transferred wholly or partly in exchange for shares issued by the company to the person transferring the business.