Incorporation of a property business

Are you a property business owner looking to grow and protect your investments? If so, incorporating your business might be the strategic move you need. While the idea of incorporation can seem daunting, it offers many potential advantages, especially for small business owners in the property sector. Let’s explore how incorporating a property business can be beneficial and the important factors you need to consider.

What is incorporation?

Incorporation is the transfer of a business owned and run by an individual or a partnership to a company. There are many reasons to consider incorporating a property business but there are tax and commercial implications arising from incorporation. This route may not therefore be suitable for all property businesses and individual circumstances should be considered. The incorporation itself may give rise to taxes including Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). In some circumstances however and when certain conditions are satisfied, neither CGT nor SDLT are payable.

Improved tax efficiency

In the realm of corporate finance, tax efficiency stands as a cornerstone of a company’s financial health. At present, companies experience taxation at rates ranging from 19% to 25% on their profits, compared to individuals who are currently taxed at rates of 20%, 40%, or 45%. This differential in tax rates underscores the potential benefits of operating as a company, though the quantum will vary depending upon how much of the profit is withdrawn. Moreover, companies enjoy the advantage of having no restrictions on the deduction of finance costs, further enhancing their financial flexibility.

A further advantage is the potential for additional one-off tax savings on the incorporation. This can enhance your financial efficiency, marking a noteworthy milestone in your journey towards business growth.

In addition, when considering capital gains, corporations may be subject to a lower tax rate than individuals. Corporate entities presently pay Corporation Tax on capital gains at between 19% to 25%, as opposed to individuals who currently pay CGT in a range broadly between 20% to 24%. This difference could have an impact on the net returns from an investment, making a corporate structure a compelling consideration for property businesses.

Flexibility

In today’s landscape, flexibility over changes in ownership is a crucial aspect that can significantly influence the growth of a company. With an incorporated property business, this flexibility is inherently enhanced. Shares within the company can be seamlessly transferred to family members, which not only helps to ensure smooth transitions and maintain the stability of the enterprise but can also facilitate future tax planning.

Mortgaged properties

 In the case of mortgaged property portfolios, it is important to discuss plans with lenders early on. In our view, a sound and sensible form of incorporation is one that includes the express consent of lenders and can, in some cases, involve a change in the lender to facilitate the transaction.

Summary

Incorporation of a property business is a strategic move that can offer considerable advantages, from potential tax savings to greater flexibility in ownership changes. Navigating through the complexities of this process can however require a lot of time and energy.

The Autumn Budget will take place on 30 October 2024. If you are considering incorporation, steps should be taken now whilst there is still clarity over the rules.

For more insights and guidance on navigating the latest property regulations, check out our South East Property Newsletter.

For further guidance on the incorporation of your property business, please do not hesitate to contact our team on 01903 234094.