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Stamp Duty Land Tax (SDLT) is a tax on land transactions in England and Northern Ireland.
SDLT was introduced by the Finance Act 2003 to replace stamp duty. Strictly, SDLT is not a stamp duty, but we will use the terms interchangeably in this article.
Today we'll explain how you may be able to avoid stamp duty by converting property jointly owned as a partnership into a limited company.
How SDLT Works
We should start by saying that you should always consult the HMRC page on Stamp Duty Land Tax, or work with a tax expert, before making any major financial or legal decisions.
HMRC has recently introduced some policies that make buy-to-let schemes less attractive. As a result, it's often more tax-efficient to transfer properties into an incorporated company.
Since 2016, a surcharge of 3% has been added to the stamp duty of second homes and buy-to-let properties. There is also a limit on the tax relief available for mortgage interest (capped at the equivalent relief for businesses).
As such, there are significant incentives to using a limited company to manage a property portfolio:
- Mortgage interest tax relief is not restricted for corporation tax purposes
- Succession planning is simpler
- Lower tax rate on your profits
- Legal protection as the company is a separate legal entity
Having said that, stamp duty would still typically apply on incorporation. But there is a way to avoid SDLT involving converting a partnership to a limited company.
Property Partnership Incorporation
100% relief on SDLT is available (in theory) in the event that you convert a partnership to a limited company. You have to meet the following conditions:
- The ownership of the new company matches that of the original partnership (in terms of share allocation)
- The partnership is registered with HMRC
- There is a separate bank account
- There is a full written partnership agreement
As long as this is all fully compliant, you don’t even need to have started with a Limited Liability Partnership (LLP). You can enjoy all the benefits of a limited company (legal protection, tax efficiency) while avoiding the burden of paying stamp duty twice when moving your property into a limited company from a partnership.
Husband And Wife Partnerships
It seems that HMRC takes a dim view of partnerships which are set up before incorporation specifically for tax purposes. In particular, if you create a partnership and then incorporate straight away (obviously as a SDLT dodge) you probably won't get away with it.
However, a husband and wife partnership is treated slightly differently.
Partnerships require "two or more people". However, a husband a wife count as two partners for compliance purposes. In some cases, they can argue that a partnership has already existed for some time before incorporation.
In the landmark case Ramsay v HMRC (2013) the married couple were successful in arguing that their "partnership" should be considered legitimate for business purposes. They were therefore allowed to take advantages of all the normal tax reliefs available to an incorporated company.
Final Thoughts
Tax laws around converting property partnerships into limited companies are complex and ever-changing. Make sure you stay up to date with the documentation from HMRC.
Or you may prefer to work with an expert such as Key Business Consultants. We've worked with hundreds of individuals, partnerships and limited companies to run their businesses in the most tax efficient way possible.
We also make sure you are fully complaint, and always represent you well to the authorities.
We would also suggest that you look for a suitable mortgage expert if you plan to own property through an incorporated company. There are a number of lenders who specialise in this area, and they will be able to give you the right advice from day one. You'll need to contact a specialist mortgage broker who'll be able to advise you and connect you with the lender.
If you'd like to discuss the stamp duty implications of buying property via a limited company, please get in touch.
