What Is Incorporation Relief and Can You Qualify?

Learn about Incorporation Relief, how it works, and whether your property business qualifies. Seek advice from a tax expert before proceeding.

Category: Guide

Incorporation Relief is a valuable tax relief that can help reduce or defer Capital Gains Tax (CGT) when transferring business assets, such as property portfolios, to a limited company. For landlords and property investors, Incorporation Relief can make the process of incorporation more financially viable.

However, qualifying for Incorporation Relief involves meeting specific criteria, and the rules can be complex. This guide explains what Incorporation Relief is, how it works, and whether your property business might qualify.

Important: This article is for informational purposes only. Auction Finance provides mortgage advice, not tax advice. Always consult a qualified tax expert before making decisions related to Incorporation Relief.

What Is Incorporation Relief?

Incorporation Relief allows you to defer paying Capital Gains Tax when transferring business assets to a limited company. Instead of paying CGT at the time of transfer, the gain is deferred until you sell your shares in the company.

Key Benefits of Incorporation Relief:

Deferral of CGT: Reduces immediate tax liabilities.
Financial Flexibility: Frees up funds to reinvest in your business or property portfolio.

Can Property Investors Qualify for Incorporation Relief?

To qualify for Incorporation Relief, your property activities must meet HMRC’s definition of a business.

1. Business Criteria

HMRC requires that property activities be more than passive investments. Your activities must demonstrate that you’re running a legitimate trading business.

Key Indicators of a Business:

Actively managing multiple rental properties.
Regular involvement in property maintenance.
Personally collecting rent from tenants.
Overseeing tenant relations and managing leases.

2. Transfer of a Going Concern

The property portfolio must be transferred as a going concern, meaning the business remains operational after the transfer. This often involves transferring the entire portfolio to the company rather than individual properties.

3. Ownership of Shares

In return for transferring the assets, you must receive shares in the company. The relief does not apply if you receive cash or other forms of payment.

Example Scenarios

Scenario 1: Eligible for Incorporation Relief

Situation: A landlord manages six properties, collecting rent, handling maintenance, and dealing directly with tenants.

Action: The landlord transfers the entire portfolio to a newly formed limited company, receiving shares in return.

Result: The landlord qualifies for Incorporation Relief, deferring CGT on the gains from the transfer.

Scenario 2: Ineligible for Incorporation Relief

Situation: A landlord owns a single rental property and employs a letting agent to manage it. Their involvement is limited to receiving rental income.

Action: The landlord attempts to transfer the property to a limited company.

Result: HMRC determines that the activity does not constitute a business, and Incorporation Relief is denied. The landlord must pay CGT on the transfer.

Advantages of Incorporation Relief

1. Defers Capital Gains Tax

Incorporation Relief allows you to defer CGT until you sell your shares in the company. This provides immediate cash flow benefits.

2. Facilitates Business Growth

By reducing upfront tax liabilities, Incorporation Relief frees up funds to reinvest in expanding your property portfolio.

3. Aligns with Long-Term Investment Goals

Incorporating your property business can provide tax advantages, such as lower Corporation Tax rates, and streamline inheritance planning.

Potential Challenges

1. Strict Qualification Criteria

HMRC has stringent requirements for what constitutes a business. Passive property investments are unlikely to qualify.

2. Loss of Personal Ownership

Transferring properties to a company means relinquishing personal ownership, which could have implications for future borrowing or tax planning.

3. Stamp Duty Land Tax (SDLT)

While Incorporation Relief covers CGT, you may still be liable for SDLT unless you qualify for other reliefs, such as Partnership Relief.

Disclaimer

Auction Finance provides mortgage advice only and is not authorised to give tax advice. The information in this guide is for informational purposes only. Please consult a qualified tax expert to assess your eligibility for Incorporation Relief and understand its implications.