Keeping The Right Company As A Property Investor

Property investors often view trading as a limited company as a way to save tax – but a special rule bars many from using this helpful tool. 

The confusion comes from incorporation relief, designed to delay any capital gains tax on transferring a trader’s assets into a company until they sell their shares. 

The relief is aimed at helping self-employed traders change their status to a limited company. 

The rules are simple – to qualify for incorporation relief, the taxpayer must be:

• A sole trader or in a business partnership
• The transfer should cover the business and all business assets except cash in return for shares in the company.

The problem is a buy-to-let property investor falls at the first hurdle.

Under tax law, they are not traders, and joint property ownership is not a formal business partnership. Then another rule completely rules the move out. 

Residential property is excluded as a business asset for incorporation relief. So, a landlord forming a company and moving their investment properties into a company triggers capital gains tax on the disposal not protected by incorporation relief. 

The only residential property that qualifies for incorporation relief will likely be furnished holiday lets. ​

The solution is for a landlord to keep any properties they already rent out in their names. Then, incorporate a company and buy any additional properties through the company. That way, the property investor can benefit from manipulating their income tax by carefully monitoring any rental profits drawn as dividends to stay below the basic income tax threshold. 

If other income pushes total income above that level, waive taking a dividend and leave the cash in the company for another time. Another reason for trading as a company rather than an individual landlord is diluting property ownership. 

A home can only have four joint owners, but if a company owns the property, the number of owners is widened to the number of shareholders. 

Many property investors consider holding buy-to-lets or houses in multiple occupation (HMOs) to spread the rental profits among more people paying basic rate tax. This is also an estate planning option to pass on a property at death. 

Companies can offer tax planning opportunities – but can also be tax traps for the unwary, so take professional advice before incorporating.