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Transferring properties into company ownership has become a hot topic, as changes in tax rules spur those with a portfolio on to looking at the best way to manage their assets, and plan for gifting to family members in the future.

 

Moving properties into a company structure is possible, but there are a raft of administrative considerations as well as tax regulations which need to be factored in before the owner kicks off the process.

Companies are useful vehicles for succession planning and passing assets on to future generations – properties can be placed into a company, and shares in that company gifted to children or other family members instead of transferring them title to the properties.

A stock transfer form is all that’s required to complete the process rather than the full conveyancing procedure needed to transfer a title, as happens during the buying and selling of homes on the open market.

Retaining control of the properties when they transfer into company ownership is a key consideration – being appointed sole director of the company would ensure the owner holds on to the reins.

Company ownership also helps protect the owner’s assets – owning a property outright and later transferring it to a child or other family member creates a risk that, if it was converted into matrimonial property, it could be included in a financial claim by the spouse or civil partner of the inheritor during a divorce.

The future transfer of ownership of a property held by a company can be restricted through shareholders agreement – these safeguards could not be put in place if a full transfer of the property was made to a family member.

Gifting shares does mean there are capital gains tax (CGT) implications, assuming the company carries out no trading, and inheritance tax (IHT) would also be payable if the company owner passed away within seven years of shares being gifted.

Further taxes are also payable by companies which own properties valued over a certain amount – annual tax on enveloped dwellings (ATED) and corporation tax (CT).

ATED is calculated using a banding system based on the value of each of property, starting from a fee of £3,500 for a portfolio valued at £500,000 to £1m and rising to £218,200 for those in excess of £20m.

And those properties need to be revalued every five years meaning that, in a strong market, tax figures could rise significantly.

Properties within the ATED bandings are also subject to further capital gains tax of 28%, if sold on by the company, dependent on how long the company has owned the property and how long it has paid ATED on it.

Properties valued lower than the ATED bandings are subject to corporation tax on gains made after a sale, calculated on the difference between the value of the property at the point the company took ownership and the date of sale.

And corporation tax is also paying on income generated by the company from the properties such as rental income. In 2015/2016, the corporate tax rate is 20%.

This is much lower than the current higher rate of income tax for individuals and could be one of the most attractive reasons to move properties into a company, especially if they are to be rented out to generate an income.

Taking out that income is where the biggest changes are pending – from 1 April 2016, notional tax credit previously in place are being abolished and replaced with a new taxable annual allowance of £5,000 on dividend income. Starting at 7.5% for the basic rate bracket, 32.5% for the higher rate bracket and 38.1% for the additional rate bracket.

We believe that these changes will result in a higher tax bill for those individuals who receive large sums in dividends. It appears that one of the main motivators behind this charge is not to target those receiving moderate dividends from listed companies but to discourage private companies from paying employee shareholders in dividends rather than in cash.

Dividend planning is becoming more important and this will need to be considered extremely carefully.

Setting up that company brings a significant administrative burden and additional legal and accountancy fees to set up the company.

A company requires to be registered with Companies House, it needs to have a Memorandum of Association and Articles of Association and in addition, annual returns and annual accounts need to be prepared and filed with Companies House.

Specialist legal advice will be required to enable the client to balance the tax considerations with the control and protection which a company structure may afford.

Chambers UK 2106

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