October 30th, 2012 / Insight posted in

Best way to hold property assets

AW writes: My wife and I own three residential properties that are rented out. We are considering transferring the properties into a new limited company. This will help when we buy a fourth property, as the bank providing the finance will be able to make its credit decisions based on all the properties held by the company rather than ourselves individually. We would also like to involve our adult children in the ownership of the new company at the start and, in the future, transfer more shares to them. Are there any tax pitfalls?

Before you do anything, talk to your current bank to get its view on your plans, as financing seems to be the main reason for the transaction, writes Chris Lane, a partner at Kingston Smith LLP.

Then consider the stamp duty land tax (SDLT) cost of the proposed transfer. Depending on the value of the properties, the SDLT bill will be quite large. For residences over £250,000 and less than £500,000 the rate is 3%, so for three properties at the lower end of the range, the cost will be about £23,000.

Second, the transfer may incur capital gains tax (CGT), which would be calculated on the market value at the time of the transfer. In theory, this gain could be rolled over into the cost of the shares you will get in the firm. To qualify for the rollover relief you will need to show the company is being run as a proper business. This means taking an active role in collecting rents, maintaining the properties and dealing with the administration.

Any shares in the new company that are eventually transferred to your children will potentially be subject to inheritance tax. However, as long as you survive seven years from the date of the transfer there will be no tax to pay. This will also be a disposal, at market value, for CGT purposes. It is possible that small gifts of shares can be made by you and your wife using your annual CGT exemptions.