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Are you aware of the tax implications of extracting your property portfolio from company to private ownership?

Angela Evans

With the introduction of the finance restriction in April 2007 (F(No.2) A 2015 s.24)  for individuals owning buy to let properties, many landlords looked at the benefits of transferring their properties to a limited company.
However, when the time arrives that this strategy is no longer suitable and the property is needed for other purposes, for example for giving to children, extracting a property from a company back into private beneficial ownership may be a costly affair. Tax costs arise both for the selling company 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 it was purchased for, adjusted for indexation up to December 2017.
The company will be making a distribution in kind. There are specific rules concerning the legality of such a distribution, determined by the availability of distributable reserves
Tax cost for the director / shareholder
No SDLT will 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
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 38.1% £247,650
Total tax cost (£79,800 + £247,650) £327,450

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, the amount amounting to the market value of the property may result in an overdrawn director’s 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.
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 13.8%.
SLDT will arise on the amount of the market value of consideration.
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 £1,267,925
Tax and employees NIC (£595,925)
Tax cost to the company
Gross bonus £1,267,925
Employer's NIC at 13.8% £174,974
Corporation tax relief at 19% (£274,151)
Corporation tax on gain £79,800
Proceeds from sale received (£650,000)
Net cash cost to the company £598,498

Total net cash cost to the company is £598,498 in case of a transfer for a consideration, compared to the total tax cost of £327,450, if the transfer is carried out as a distribution in specie.
Practical considerations
Apart from cash flow considerations for the business and its director-shareholder, 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 do not hesitate to contact your local Moore office.