Stamp Duty pitfalls for those running property rental businesses

Q. I am considering transferring some of my buy to let properties to my own limited  company as I’ve heard I’ll pay less tax on the rental profits I make. However, someone has mentioned that Stamp Duty should not be overlooked when making this decision. Can you explain?

A. Holding buy to let properties in your own limited company can be an attractive way of owning such properties. With lower rates of corporation tax (currently 19%) and, with 100% mortgage and loan interest deductions still available to companies follwoing changes to interest relief for individual landlords, it's easy to see the attaraction.

However the changes to Stamp Duty Land Tax ("SDLT") means that you should carefully consider the implications before proceeding.

You need to remember that there are different rules and land taxes currently applied in Scotland and from 1 April 2018 for property transfers in Wales.

For property transfers in England where an individual is transferring a property to a connected limited company the following needs to be considered:

The price payable for the property for SDLT purposes can be no less than the open market value. SDLT cannot be avoided if the transfer is made for less than market value or for nil consideration.

The additional SDLT rate of 3% applies to all residential property transferred into your company e.g. a £220,000 residential buy to let property would result in SDLT of £8,500 becoming payable - (£125,000 x 3% = £3,750 plus £95,000 x 5% = £4,750).

If the transfer to your company is of a non-residential commercial property e.g. a £220,000 warehouse then this would result in a much lower SDLT bill of £1,400 becoming payable - (£150,000 x 0% = £0 plus £70,000 x 2% = £1,400).

If more than one residential property is transferred to your company, then it can be possible to make a claim to reduce the overall SDLT burden by using ‘multiple dwellings relief’. This relief calculates the SDLT payable by reference to the average value of the properties transferred.

Remember that the punitive higher SDLT rate of 15% can apply where your company acquires a single dwelling property valued at over £500,000, unless it is used for qualifying business purposes. Thankfully the lower SDLT rates apply where the property is held as a buy to let investment in your company. However, the higher SDLT rate may become payable if there is a change of use within three years.

Before proceeding I always recommend a thorough review of the SDLT implications should be made before any transfers of property take place as there can be some surprising results.

As with all things tax, it does make sense to take proper advice.