Many landlords are incorporating their property businesses in order to retain tax relief on buy-to-let mortgage interest. But high value properties owned through companies are subject to certain taxes that investors should be aware of.
Both a higher stamp duty rate and annual charge may apply
A recent study from Santander predicts that the number of UK properties worth more than £1 million will triple by 2030 (source: www.theguardian.com).
As certain taxes for ‘enveloped’ dwellings (those held through a limited company) trigger at either £500,000 or £1 million, the number of affected properties will rise quickly. Average prices in London already exceed £500,000, and average prices in the East and South East of England will hit that benchmark in the next 15 years.
Limited company purchasers should therefore bear in mind two taxes:
- A higher rate of stamp duty, payable under FA 2003 schedule 4A and FA 2014 section 111 at 15% on acquisitions valued at more than £500,000
- An Annual Tax on Enveloped Dwellings (ATED), payable under FA 2013 part 3
The lower threshold for ATED is currently £1 million. It will fall to £500,000 on 1 April 2016 (FA 2014 section 110).
Transferred properties are also affected
The higher stamp duty rate will apply not only to property purchases made through a limited company, but to transfers into a company too.
A company and the individual who owns it are separate entities in the eyes of the law. Thus, the law treats the transfer of a property into a limited company as a sale. And under FA 2003 section 53(1) and CTA 2010 section 1122(3), a sale to a connected company takes place at open market value.
This means the company must pay stamp duty on the purchase at its full value, irrespective of how much money changed hands. If the market value exceeds £500,000, the 15% rate for corporate acquisitions will apply.
Property businesses don’t usually need to pay, but investors should still be wary
Fortunately for property investors, most types of property business are exempt from ATED and the higher rate of stamp duty. But HMRC does not grant relief automatically, and will revoke it under certain circumstances.
HMRC’s Stamp Duty Land Tax (SDLT) manual details the conditions under which relief from the higher rate of stamp duty will apply, and when it may be withdrawn.
ATED is a more complex matter. As ATED is an annual charge, corporate owners of high value property need to evidence that they meet the relief criteria at the beginning of each chargeable period. This means, for instance, that a company that owns a rental property needs to ensure that it is either tenanted, or that they are taking steps to find a tenant for it.
Full details are in the government document, Annual Tax on Enveloped Dwellings – Technical Guidance.