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Many investment properties are acquired through a limited company for a variety of reasons.
Complications arise when this structure is no longer appropriate, for example, there may be a desire to gift to a child, and extracting a property from a company back into private beneficial ownership can be a costly affair. Tax costs arise both for the company disposing of the property 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 the property was purchased at. This transfer will be treated as the company making a distribution. Please note this distribution will obviously need to meet the usual conditions surrounding distributable reserves.
Tax cost for the director / shareholder -
Stamp Duty Land Tax (SDLT) will not arise if the property is obtained as a 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 of the individuals. The example below assumes the property is transferred to the director by way of distribution in specie and that the individual is subject to the highest tax rates.
| 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 shareholder |
£650,000 |
| Tax at additional dividend rate 39.35% |
£255,775 |
| Total tax cost (£79,800 + £255,775) |
£335,575 |
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, any such resulting loan may result in an overdrawn participator 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 in the same way as the above example where the property was distributed in specie.
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 15.05%.
SLDT will arise on the amount of the market value of consideration.
Example
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 and assumes highest rates of tax applicable.
| 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 Bonus |
£1,298,551 |
| Tax and employees NIC (ie tax 45% and NI 3.25%) |
£626,551 |
Tax cost to the company
| Gross bonus |
£1,298,551 |
| Employer's NIC at 15.05% |
£195,432 |
| Corporation tax relief at 19% |
-£283,857 |
| Corporation tax on gain |
£79,800 |
| Net Tax saving for the company |
(£8,625) |
| Total tax cost |
£617,926 |
In both examples the end result is that the Director is left with ownership of the same property. Under the purchase method the company pays less tax overall (mainly due to the effect of the Corporation Tax saving resulting from the grossed-up bonus) but the individual suffers a much higher level of income tax. This compares to the total tax cost of £335,575 where the transfer is carried out as a distribution in specie.
Practical considerations
Apart from
cash flow considerations for the business and its director-shareholder, and the need for their to be sufficient distributable reserves in the company to enable the dividend to be paid in that scenario, 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.
Before any decision is taken regarding buying a property through a company or extracting a property from a company advice should be sought to ensure that the plans meet the needs for the long term as well as the short term.
If you have any questions, or would like more information, please
contact your local Moore office.