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Incorporation relief or not?

IFA member Simon Howley insists that fellow accountants tread very carefully over the grounds of property, particularly when it comes to managing incorporation and subsequent tax matters.

Back in the early 2000s it used to be common practice to find property held within the trading company – investment and commercial property. As this was the main source of revenue, it was cheaper than extracting monies via dividends or salary, and then buying the property out of net income.

However, the downside to holding the property within the company was the company paid corporation tax on any disposal and then the individuals paid income tax on the extraction of the net proceeds. It felt like ‘double taxation’.

With careful structuring of a transaction and clever use of the then SDLT rules, it was possible to extract the property from the company without triggering either a SDLT charge nor a capital gain within the company. This was never a perfect solution, but clients were happy that any future capital growth in the value of the property (from date of the transfer), would only be taxed once as a capital gain on the individual partners.

Roll forward to 2019 and every ‘Tom, Dick and Harry’ owning a garden shed wants to incorporate. There is nothing wrong with incorporating a property portfolio for the correct client, but many of the clients who approach me wishing to do this fall at the first hurdle. They simply do not qualify as a ‘business’.

I do not have the space to explain the nuances of what is or isn’t a ‘business’ in this article.

However, it is a deciding factor when applying for the exemptions from CGT, on any transfer of property from personal to corporate ownership, that the activity is classed as a business.

I am also aware some clients are being told to create a partnership (normally an LLP) to try and avoid the SDLT on the transfer. This old trick will also fail, as anti-avoidance rules are already in place to counteract this. It is crucial that careful tax analysis is undertaken before any incorporation transaction is carried out, to avoid triggering any unwanted tax liabilities and attention from HMRC.