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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.
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.
When you transfer business assets (e.g., properties) to a company, the gain is calculated based on the difference between the market value of the assets and their original purchase price. Incorporation Relief defers this gain, rolling it into the value of your company shares.
To qualify for Incorporation Relief, your property activities must meet HMRC’s definition of a business.
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:
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.
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
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.
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.
Incorporation Relief allows you to defer CGT until you sell your shares in the company. This provides immediate cash flow benefits.
By reducing upfront tax liabilities, Incorporation Relief frees up funds to reinvest in expanding your property portfolio.
Incorporating your property business can provide tax advantages, such as lower Corporation Tax rates, and streamline inheritance planning.
HMRC has stringent requirements for what constitutes a business. Passive property investments are unlikely to qualify.
Transferring properties to a company means relinquishing personal ownership, which could have implications for future borrowing or tax planning.
While Incorporation Relief covers CGT, you may still be liable for SDLT unless you qualify for other reliefs, such as Partnership Relief.
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.
Ans: Typically, HMRC expects the transfer of an entire portfolio as a going concern. Transferring a single property is unlikely to qualify.
Ans: No, Incorporation Relief only defers CGT. SDLT may still apply unless you qualify for additional reliefs.
Ans: For partnerships, reliefs like Partnership Relief may complement Incorporation Relief to reduce both SDLT and CGT liabilities.
Ans: This depends on your long-term goals and tax position. A tax advisor can help you evaluate the benefits and costs of incorporation.
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