You may not always want incorporation relief

The issue

Property business incorporations continue to be a very topical issue. Landlords are keen to incorporate residential portfolios so as to escape the punitive tax regime that they are currently in, where all profits are subject to tax and finance costs are refused anything except basic rate tax relief. Incorporations of commercial property businesses can also be attractive as a means of moving profits from a personal tax regime to a corporation tax regime (currently at 19%).

The main barriers to a property business incorporation are stamp duty land tax (SDLT) and capital gains tax. SDLT will often not be a problem where the properties are held by a family partnership (or a couple which can be treated as such) and capital gains tax will not be a problem if the transaction can fall within incorporation relief provisions in section 162 TCGA 1992. The key points of this relief are as follows:

1. All assets of a business except cash have to be transferred into a company.
2. The  consideration must be in the form of shares.

Some non-share consideration

The general aim is for any gain which would have arisen on the assets (by reference to their market value) to be deferred into the tax cost of the shares, so that it will crystallise when they are sold. Although these incorporations usually involve all gains being deferred in this way, it is possible to include some non-share consideration and trigger a taxable gain. In some cases this will make a lot of sense.


Jim and his wife Julie operate a £4m commercial property portfolio in an LLP. There are £2m of borrowings in this business and gains are standing at £1m. They resolve to incorporate the business in exchange for shares but then change their minds at the last minute so that some non-share consideration is included.

The final transaction involves a new company acquiring the net assets through the issue of shares and £500,000, which stands on loan account. Therefore £1.5m of the net assets (of £2m) are acquired through the issue of shares and £0.5m are acquired through the loan account. This means that 25% (£0.5m/£2m) of the £1m gain will be chargeable and the remaining £0.75m can be deferred against the cost of the shares.

In the above example Jim and Julie would have to pay £50,000 of capital gains tax (20% on £250,000) to enjoy a £500,000 loan account in the company. This repayment could be repaid from company profits without the need to pay dividends.

Forbes Dawson view

The sense in including non-share consideration in incorporations will depend on the tax that would otherwise be incurred on extracting dividends from the company. Often the dividend tax rate will be at least 32.5% and so the 20% rate will be attractive. This kind of planning is particularly relevant now given widespread pessimistic views on future tax rate rises. The question of non-share consideration should usually now at least be considered.




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