Transferring Property to a Limited Company: A Scottish Accountant's Perspective
As an accountant based in Scotland, I often receive inquiries from clients about the process and implications of transferring property from personal ownership to a limited company. This blog aims to provide an overview of the costs, taxes, and other considerations involved in such a transfer, specifically from a Scottish perspective.
Transferring property to a limited company can offer benefits, including potential tax efficiencies and limited liability protection. But it also involves various costs and tax implications that need to be carefully considered. And each person’s situation is different.
One of the main reasons people choose to transfer property to a limited company is because the interest portion of mortgage payments is fully tax-deductible for the company. In contrast, if the property remains in personal ownership, only 20% of the interest portion is tax-deductible, resulting in higher taxable profits.
Example Scenario
Let's consider an example where I own a property in Edinburgh worth £180,000, with no mortgage on the property. I bought the house 15 years ago for £100,000. I spend all my time managing this property, meaning I do not use a managing agent. I want to transfer this property to a newly incorporated limited company that has no past trading history or other properties.
Capital Gains Tax (CGT) Considerations
When transferring a property to a limited company, it is treated as a sale at market value, even if no money changes hands. This means you may need to pay CGT on any increase in the property's value since you acquired it. The CGT rates for residential property for the 2025-2026 tax year are 18% for basic rate taxpayers and 24% for higher rate taxpayers >> Capital Gains Tax — rates of tax - GOV.UK
CGT Calculation:
Purchase Price: £100,000
Market Value: £180,000
Gain: £180,000 - £100,000 = £80,000
If you are a higher rate taxpayer, the CGT would be:
CGT: £80,000 * 24% = £19,200
However, since I spend all my time managing the property, I may qualify for Incorporation Relief. This relief allows the deferral of CGT until the shares in the company are sold.
Requirements for Incorporation Relief
To qualify for Incorporation Relief, the following conditions must be met:
Business Transfer: You must transfer your business to the limited company. This includes all business assets, except cash.
Shares in Exchange: The transfer must be in exchange for shares in the company.
Trading Business: The business must be a trading business, not just an investment. This typically means you actively manage the property, spending a significant amount of time on it. This typically means you are actively involved in managing the properties, such as handling tenant issues, maintenance, and other day-to-day operations. The level of activity required to qualify as a trading business is not strictly defined, but it generally involves spending a significant amount of time managing the properties.
Incorporation Relief can apply to both long-term and short-term residential property rentals, provided certain conditions are met.
Land and Buildings Transaction Tax (LBTT)
In Scotland, the equivalent of Stamp Duty is called Land and Buildings Transaction Tax (LBTT). When transferring a property to a limited company, LBTT is applicable based on the market value of the property at the time of transfer. For our example property worth £180,000, the LBTT rates for residential properties for the 2025-2026 tax year are as follows:
0% on the first £145,000
2% on the portion from £145,001 to £250,000
LBTT Calculation for £180,000 Property:
0% on the first £145,000: £0
2% on the remaining £35,000: £35,000 * 0.02 = £700
So, the total LBTT payable would be £700.
Since the limited company does not own any other properties (in our example), the Additional Dwelling Supplement (ADS) of 8% would not apply. If the limited company did have other property in the company, the ADS of 8% would also be applicable of £7200
Other Considerations
Legal and Professional Fees: You will incur legal fees for transferring the property and setting up the limited company. These fees can vary but typically range from £500 to £1,500 for legal services.
Company Set-Up Costs: The cost of incorporating a limited company in Scotland is relatively low. Companies House charges a fee of £12 for online registration and £40 for paper registration. Additional costs may include fees for a registered office address and professional advice as well as submitted financial statements and tax returns on a yearly basis. Once a year you also need to pay confirmation statement fees to Companies House.
Corporation Tax: Once the property is in the limited company, any rental income or capital gains will be subject to corporation tax. The current rates are 19% for profits up to £50,000 and 25% for profits above £250,000.
Mortgage Considerations: If you have a mortgage on the property before you transfer it, transferring it to a limited company can be more complex. The mortgage would need to be transferred to the company, which may involve renegotiating terms or obtaining a new mortgage. It's crucial to speak with your mortgage advisor to understand the implications and ensure the transfer is feasible.
Using the money in the limited company: It's important to remember that money in the limited company belongs to the company, not the shareholders or directors. If you want to use company funds for personal use, you will need to withdraw the money as a salary, dividend, or director's loan, each of which has its own tax implications. For example, dividends are subject to dividend tax, and director's loans may incur additional tax charges if not repaid within a certain period. Always consult with a tax advisor to understand the best approach for your situation.
Transferring a property to a limited company can be a beneficial move, but it requires careful planning and consideration of various tax implications and costs. It is highly recommended to get professional advice to ensure the transfer is done to suite your needs, both financially and practically.
If you have any questions or need further assistance, please feel free to contact me.
Disclaimer: This blog is written from the viewpoint of a Scottish accountant and is intended for clients primarily based in Scotland. The information provided is based on current Scottish tax laws and regulations. It is always a good idea to consult with a professional if you have a specific query.