Incorporation tax relief is the relief given to individuals who transfer their unincorporated business (that is the business run as a sole trader or in a partnership) to a limited company.
If you are a landlord does it apply to you?
Since the implementation of the final stages of section 24 in April 2020, many landlords are considering running their property business through a limited company. This is because section 24 does not apply to the companies and the finance cost can continue to be deducted as an expense in a limited company.
While there are many benefits of running a business through a company there are many tax implications that are considered. For example, after incorporation, if you transfer the property from yourself to the company this will be treated as a sale (Since you and the company will be two separate legal entities) from the tax point of view. Taxes that arise are SDLT and Capitals Gains Tax. However, there is one relief available to you which is incorporation relief.
If you are eligible you will get incorporation relief. This is given automatically and you don't have to apply for that.
To be eligible for Incorporation Relief you have to meet the following conditions:
- You must be a sole trader or in a
- Transfer the business and all its assets except cash in return for shares in the company.
If you meet the above criteria, you will be able to delay paying CGT until the business is sold. This will help you will the cash flows.
Since the incorporation relief is available if there is a transfer of the business, the landlords will need to consider if renting of their property is a 'business'. It has seen that landlords who are actively involved in the business are considered to be running a 'property businesses' and therefore they will be eligible for the relief. It's not necessary that they are holding more than one property. However, many accidental landlords who have passively invested in the property might not be considered to be running a `business'.
When you transfer all the capital assets to a company, the gain on the disposal is deducted from the base cost of the shares, this base cost is the market value of the shares as you transferred all the assets which included land buildings but not cash of course at the market value. And this gain will be taxed when you sell the shares.
In case of the property business, the capital gain will be the difference in the market value of the property and the cost of the property.
Let's look at an example below,
Mr Kim, transfers his property for £0 and the market value of the property is £300, 000. The cost of this property was £200, 000. The gain will be £100, 000 and this can be rolled over.
Other costs that will be incurred are which can further reduce the tax on the gains.
- SDLT: The tax you will have to pay if you are transferring the property into a limited company
- Solicitor Fees
- Accountancy fees
- Any additional interest on the commercial mortgage that you might have to arrange when you are running the business through a limited company.
For further information, on SDTL please contact Taxaccolega based in Croydon and southhall at 020 8127 0728 or email us at info@taxaccolega.co.uk our expert team of accountants and tax adviser can help you with the tax issues involved in transferring your business to a limited company.