How do you transfer a company property to personal ownership?
We were recently contacted by Fred, whose company bought a residential property several years ago which he lives in. His co-directors have recommended that the property be transferred to the shareholders’ personal ownership. What are the possible tax consequences?
HMRC aren’t keen on a company owned property used by shareholders as temporary or permanent homes. In fact, in 2012 a special tax (Annual Tax on Enveloped Dwellings (ATED)) was introduced to discourage it. Also, where ATED applies a higher rate of corporation tax is payable if a company sells the property for a gain. These special tax charges can make owning a dwelling through a company very costly.
Transfer to personal ownership
How can you transfer a company property to personal ownership ?One way to avoid the ATED is to transfer ownership of the property to the shareholders. The simple way is for them to buy it from the company at market value (MV), but this can be especially costly if they need to borrow to do it. Plus, they’ll have to pay stamp duty land tax (SDLT) (or land and buildings transaction tax (LBTT) in Scotland, or land transaction tax (LTT) in Wales) on the purchase price.
If the shareholders can’t afford the full price, they can pay the company less. This won’t reduce the SDLT/LBTT, but at least the shareholders will have to find less cash.
The Tax Trap. HMRC will treat the sale by the company (and purchase by the shareholders) as made at MV. The difference between the MV and the amount paid by the shareholders counts as their taxable income. For example, if the shareholders paid £250,000 for a property worth £650,000, they would be taxed on £400,000 as income as if it were a dividend.
Another option is for the shareholders to pay market value for the residential property, but spread payment over time. The tax drawback with this option is that the company has to pay tax equal to 32.5% of the amount owed, although it can reclaim a portion of this each year relative to how much of the debt the shareholders have repaid. The bad news is that it doesn’t affect the SDLT/LBTT payable, i.e. it’s still payable on the MV. Overall, this is probably more tax efficient than borrowing from a bank to make the purchase, but there’s a better alternative.
Tax Tip. The company can transfer the property as an “in specie” dividend. The big advantage to this is that the SDLT/LBTT/LTT is avoided in most cases, although the other tax consequences are the same.
In specie dividend admin issues
An in specie dividend is the transfer of an asset instead of making a cash payment. The dividend must specifically be declared as “in specie”. A normal (cash) dividend which is simply to be met by transferring the property won’t prevent the SDLT/LBTT/LTT charge. The other paperwork for transferring is the same as that as if you were paying for the property, with the exception of there being no SDLT/LBTT/LTT.
Other taxes. Whichever method you use to transfer a property remember that it counts as a sale by the company at market value, on which it will have to pay tax if it makes a gain.