Incorporate PPR, stamp duty impact

[Adam Khan]

Hi,

I live in a flat and have always lived in it since I purchased it. I paid £290k, mortgage is paid.

I am looking to create a company and incorporate the flat. So property will become a rental property

So then I can pay a lower rate of Corporation Tax compared to Income tax on the profits.

If the property has always been my PPR then is there any Stamp Duty due when I incorporate?

I will buy a new property and move into it.

Thanks
Adam

[pawncob]

I think you should consult an accountant to deal with your increasingly interconnected property affairs.

Of what possible benefit is the transfer to a LTD? Have you thought about this?

[section 44]

So then I can pay a lower rate of Corporation Tax compared to Income tax on the profits.

Difference in the overall tax liability may not be significantly different, assuming that you will extract profits from the company as a dividend

If the property has always been my PPR then is there any Stamp Duty due when I incorporate?

Yes. Subject to any relief or exemption, the company will pay stamp duty land tax based on not less than the market value of the property.

[Adam Khan]

Thanks for the helpful reply section 44

I thought I would not have to pay stamp duty as the property would be gifted to the company and it was a PPR, but appears HMRC have a way around everything so they can get their cut!

The idea was any profit the company made would remain in the company and repay the mortgage and thereafter I would leave any profit in the company and withdraw upon retirement, as a lower rate taxpayer.

As a 40% taxpayer am just not sure it's worth renting out...

[King_Maker]

What mortgage? You stated that it has been "paid".

A gift to a "connected company" is one of the instances when SDLT is payable on a gift.

[Adam Khan]

Thanks for confirmation King_Maker

Mortgage paid - well noted

So here was my plan which is getting more expensive as I thought it would not be:

1) My PPR I purchased for £290k, I wanted create a company and gift the house to the company
2) PPR is now worth £350k, so the SDLT on incorporation would be £7,500 (think I could handle that )
3) Re-mortgage the property and take out £140k equity
4) This equity would form the deposit for my new PPR - Happy days!

hmmm I wonder at what point I could take the £140k equity out before incorporation or after!? Confusing, surely if I take out the £140k after incorporating it belongs to the company and not me and I would have to take it out of the company? Would that be straightforward?

Or could I get a £140k mortgage first and the incorporate, is that allowed? would the bank let me incorporate then?

[bd6759]

Why gift it to the company? If it is your PPR there is no CGT on the disposal, but there is SDLT whether gifted or sold.

As you note, once you dispose of it, the property belongs to the company. If you gift it, the company owes you nothing. If you sell it, the company owes you £300K.

The company can repay you the £300K as and when it has the money to do so. This payment is the discharge of a debt: it is not taxable income.

[Adam Khan]

mmm If I create a company and sell my PPR to the company for £350k, the company would not have that money in it to pay me. So I don't understand how selling to company would work.

Also even if I did gift the house into a company (not sure what all the terms are but often referred to as incorporating, so the correct might not even be gifting it to a company but incorporating), I should still be able to take £350k out as discharge of a debt because effectively that's the amount of capital that I put into the company right.

Think my next step is to speak to a bank about re-mortgaging options though

[King_Maker]

The normal method is to leave the amount owed to you from the company as a director's loan.

You may find yourself restricted for corporate mortgages - often higher interest rates and lower LTVs.

[Adam Khan]

So when the company is incorporated it shows a loan at market value of the property to me.

So if I need to re-mortgage the property - I can still do this under the company?

Won't the company have a loan of £350k to me and then a loan of £140kk to the bank?

I can still get a mortgage but it will be a corporate mortgage with a higher interest rate.

Makes sense I guess.