Many business owners purchase rental residential properties through their company primarily to benefit from mortgage interest relief, which is otherwise limited if the property is rented out in the owner’s personal name. However, this strategy may no longer be effective if the business owner decides to live in the property or transfer it to a child. In such cases they may seek to extract the property from the company into private ownership. While this may seem straightforward, it can be a costly affair due to tax implications for both the company and the shareholder.
No Consideration Involved
Tax Cost for the Company
When transferring the property, the company will be subject to Capital Gains Tax (CGT) based on the market value at the time of transfer. If the property was purchased before December 2017, indexation allowance will apply. The transfer will also be treated as a distribution in specie to the shareholder subject to the usual conditions regarding distributable reserves.
Tax Cost for the Shareholder
As there is no consideration, there will be no Stamp Duty Land Tax (SDLT) charged provided there is no assumption of debt. For income tax purposes the distribution in specie will be taxed at the standard dividend rate.
Example:
Let’s assume the market value (MV) of the property at the time of transfer is £450,000, and the company purchased it for £300,000. The shareholder receiving the property is an additional rate taxpayer.
Property MV: £450,000
Cost: £300,000
Chargeable Gain: £150,000
Corporation Tax at 25%: £37,500
Distribution to Shareholder: £450,000
Dividend Tax at 39.35%: £177,075
Total Tax Cost: £214,575
Purchase for Consideration
Tax Cost for the Company
When there is a consideration involved CGT will apply based on the difference between the MV (purchase price) and the company’s original acquisition cost. The company may choose to pay the shareholder/director a bonus to cover the purchase price. As this is treated as an employment expense the company will receive corporation tax relief on the bonus paid. However tax and employer's National Insurance Contributions (NIC) will be calculated based on the grossed-up amount.
If the company loans money to the shareholder/director to finance the purchase the company will face a Section 455 (s.455) tax charge at 33.75%. Additionally if no interest is charged on the loan a Benefit-in-Kind (BIK) charge at 13.8% would arise.
Tax Cost for the Shareholder
In this case SDLT will apply as there is consideration involved. Additionally income tax will arise on the bonus payment.
Example:
Using the same scenario as before:
Property MV: £450,000
Cost: £300,000
Chargeable Gain: £150,000
Corporation Tax on Gain: £37,500
For the Bonus Payment:
Bonus Required to Pay Purchase Cost: £450,000
Grossing up for NIC and Tax (45% + 2%): £849,057
Tax & Employer's NIC: £399,057
For SDLT (assuming additional property and a 3% surcharge):
£250,000 x 5%: £12,500
£200,000 x 10%: £20,000
Total SDLT Charge: £32,500
Cost to the Company:
Gross Bonus: £849,057
Employer's NIC at 13.8%: £117,170
Corporation Tax Relief at 25%: -£241,557
Corporation Tax on Gain: £37,500
Net Savings for the Company: (£86,887)
Total Tax Cost:
Income Tax on Shareholder: £399,057
SDLT on Shareholder: £32,500
Net Savings for Company: (£86,887)
Overall Tax: £344,670
With both methods (with or without consideration) the director/shareholder ends up owning the property. Under the consideration method, the company gains corporation tax relief on the bonus and NIC, but the individual pays higher taxes. Without consideration, the individual pays less tax due to the lower dividend tax rates and no NIC on dividends, though the company doesn’t benefit from any relief.
Extraction Through Liquidation (MVL)
An alternative approach is to liquidate the company via a Members' Voluntary Liquidation (MVL) and distribute the property to the shareholders. In this process a liquidator is appointed to transfer the property to the shareholders as part of the liquidation distribution. After settling any liabilities the company is dissolved.
The cost of liquidation can range from £3,000 to £5,000, and more, and so should be factored into the decision-making process.
Tax Cost for the Company
As with other methods, CGT applies to the difference between the property’s MV at the distribution date and its base cost.
Tax Cost for Shareholders
For shareholders, the distribution is treated as a capital distribution subject to CGT. The taxable amount is the MV of the property at the distribution less the base cost of the shares. SDLT does not apply as there is no purchase involved. In a MVL the property distribution is treated as a return of capital.
Example:
Property MV: £450,000
Cost: £300,000
Chargeable Gain: £150,000
Corporation Tax on Gain: £37,500
For the Shareholder:
Property Value: £450,000
Base cost of shares: £300,000
Capital Distribution: £150,000
CGT at 24%: £36,000
Total Tax Cost:
For the Company: £37,500
For the Shareholder: £36,000
Total Cost: £73,500
Speak to an Expert
As shown in the examples above, there are several ways to extract property from a company, each with its own tax implications. Other factors must also be considered to determine the most appropriate strategy. If you would like more information or need tailored advice, please contact our tax team.
Authored by: London Tax Team
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