Transferring a property portfolio into a limited company can offer long term tax and succession benefits, but if done incorrectly it can trigger significant Capital Gains Tax and Stamp Duty Land Tax. There is no automatic tax free route. However, with careful planning, it is possible to restructure ownership in a way that can substantially reduce or defer tax.
This article explains the commonly used partnership to incorporation route, including the tax conditions, timing, and risks involved.
Why Landlords Consider Incorporation
Landlords typically look to move property into a company for several reasons:
- Full deduction of mortgage interest within a company
- Lower effective tax rates on retained profits
- Easier profit extraction planning
- Succession and inheritance planning
- Separation of risk from personal ownership
However, simply transferring personally owned properties into a company is usually treated as a disposal for tax purposes.
The Problem With a Direct Transfer
A direct transfer of properties into a limited company normally results in:
- Capital Gains Tax based on market value
- Stamp Duty Land Tax including the 3 percent surcharge
- Potential refinancing costs
- Loss of personal tax allowances
For portfolios with significant gains or debt, this can make incorporation commercially unviable unless reliefs are available.
Using a Property Partnership as the First Step
One recognised planning route is to operate the property business through a genuine partnership before incorporation.
Step 1. Establish a Property Partnership
This can be between:
- Husband and wife
- Family members
- Other joint owners
The key requirement is that the activity must constitute a property business, not passive investment.
This involves:
- Active management
- Regular decision making
- Repairs, lettings, compliance, financing
- A formal partnership deed
- Separate partnership bank account
- Partnership tax returns
KSM can design and document partnership deeds that clearly define profit sharing, responsibilities, and capital ownership.
Step 2. Transfer Properties Into the Partnership
Where properties are already jointly owned, this is usually an internal restructuring.
Where properties are owned by one individual, transferring an interest to the partnership can trigger tax if not structured carefully.
This stage must be planned in advance to avoid unintended Capital Gains Tax or Stamp Duty consequences.
Step 3. Operate the Partnership as a Business
This is the most critical phase.
To qualify for incorporation relief later, the partnership must demonstrate that it is running a business, not merely holding investments.
HMRC looks at:
- Level of activity
- Time spent managing properties
- Scale of the portfolio
- Commercial decision making
- Evidence over time
There is no fixed statutory minimum period, but in practice two years of genuine partnership trading is often used to build a defensible position.
Step 4. Transfer the Partnership Business to an LLP
After establishing a trading history, the partnership can be transferred into an LLP.
Why LLP?
- An LLP is treated as transparent for tax
- No Capital Gains Tax if interests remain proportionate
- No Stamp Duty Land Tax in most cases
- Clear step towards corporate style ownership
At this stage, the business continues uninterrupted, just under a different legal structure.
Step 5. Incorporate the LLP Into a Limited Company
This is where Incorporation Relief may apply.
Incorporation Relief Explained
Incorporation relief allows Capital Gains Tax to be deferred when a business is transferred to a company in exchange for shares.
To qualify:
- A business must be transferred as a going concern
- All assets except cash must be transferred
- Shares must be issued as consideration
- The business must be more than passive investment
If successful, the capital gain is rolled into the value of the shares and no immediate CGT is payable.
Stamp Duty Land Tax Considerations
Stamp Duty is often the biggest cost.
Possible reliefs include:
- Partnership rules where ownership proportions remain unchanged
- Relief on incorporation where conditions are met
- Debt restructuring planning
These rules are complex and highly fact specific. Incorrect sequencing can result in full SDLT plus the 3 percent surcharge.
Key Risks and HMRC Challenges
This strategy is not risk free.
HMRC may challenge:
- Whether a genuine business exists
- Artificial steps taken purely for tax avoidance
- Insufficient activity levels
- Short timeframes with no commercial substance
Documentation, evidence, and commercial rationale are essential.
When This Strategy Works Best
This route is most suitable where:
- There are multiple properties
- Active management is already in place
- There is significant mortgage interest
- Long term holding is intended
- Succession planning is a priority
It is generally not suitable for small or passive portfolios.
Final Thoughts
There is no single tax free button for incorporating property. However, with careful planning, correct sequencing, and proper documentation, tax can often be deferred rather than paid upfront.
This is an area where early advice makes a material difference. Once a transfer is done incorrectly, it cannot usually be undone.
KSM can advise on structuring, partnership deeds, LLP formation, incorporation planning, and full tax modelling before any step is taken.
