How to Sell a Rental Property Owned by a Limited Company: Tax and Your Options

Holding rental property through a limited company became popular after the mortgage interest tax changes hit individual landlords, and a lot of those companies are now reaching the point where the directors want to sell. Selling company-owned property is mechanically similar to any other sale, but the tax works differently, and the choice between selling the property and selling the company itself can make a real difference to what you end up with. This guide covers the main tax points, the two ways to structure the sale, what a buyer will need from the company, and how a fast sale fits in.

Disclaimer: We’re property buyers, not accountants or tax advisers, and this article is a general guide to how corporation tax, dividends and company sales usually work. The figures and rules mentioned were correct as far as we know at the time of writing, but tax rates, thresholds and reliefs change, and how they apply to your company depends on its accounts, its year end and your own circumstances. Before you agree to a sale, speak to a qualified accountant who can look at your company’s position and tell you what you’ll actually pay.

The Tax Position When A Company Sells Property

When a limited company sells a property, the gain is subject to corporation tax. That brings a few differences from a personal sale, where capital gains tax would apply.

• The rate. Corporation tax is charged at 25% for companies with profits above £250,000, 19% below £50,000, and a marginal rate between the two. The gain on the property is added to the company’s other profits for the year to work out which band applies.
• No annual exemption. Individuals get a small tax-free allowance on capital gains each year. Companies don’t.
• Indexation. Companies could once increase the base cost of an asset in line with inflation, but indexation allowance was frozen at December 2017. If the company has owned the property since before then, some relief may still apply for the period up to that date.
• Costs you can deduct. The purchase price, stamp duty paid on acquisition, legal fees on purchase and sale, and capital improvements all reduce the gain. Routine repairs don’t, because they’ll already have been deducted from rental profits.

After the company has paid corporation tax on the gain, the remaining proceeds belong to the company. Getting them into your own hands is the second tax event.

Extracting The Money After The Sale

If you want the sale proceeds personally, you have three main routes.

• Dividends are the simplest. The company pays you a dividend from its post-tax profits and you pay dividend tax at your marginal rate. This is the most common route for companies that will carry on trading or holding other properties.
• Repaying a director’s loan is tax-free. If you lent the company money to buy the property in the first place, and that loan is still outstanding, the company can repay it from the proceeds with no further tax.
• Closing the company through a members’ voluntary liquidation lets you take the remaining funds as a capital distribution, which is taxed as a capital gain in your hands. Business Asset Disposal Relief may reduce the rate on qualifying distributions, though property investment companies often don’t qualify, and the rules on this have tightened. Your accountant will tell you whether it applies.

Option One: Sell The Property

The company sells the property in the ordinary way. It instructs a solicitor, the buyer’s side raises enquiries, and completion happens with the company as seller. The buyer pays stamp duty on the purchase as normal. The company then pays corporation tax on the gain.

This is the cleanest route and the one most buyers expect. It works whether the property is vacant or tenanted, and it’s the only realistic option when the company owns several properties and you’re selling just one.

Option Two: Sell The Company

If the property is the company’s only significant asset, you can sell the shares in the company to the buyer. The company that owns the property changes hands, and the property stays exactly where it is.

The attraction for the buyer is stamp duty. Transferring shares attracts stamp duty at 0.5%, against the far higher stamp duty land tax on a residential purchase, particularly with the additional property surcharge. The attraction for you is that a share sale is taxed as a personal capital gain on the shares, which avoids the double layer of corporation tax and then dividend tax.

The drawbacks are real. The buyer inherits the company’s entire history, including any undisclosed liabilities, so they’ll want warranties, indemnities and detailed due diligence on the company’s accounts and tax filings. That makes the legal work longer and more expensive. Many buyers, including most cash buying companies, prefer to buy the property, and lenders funding a buyer’s purchase generally won’t lend against shares. Share sales tend to suit deals between investors who both understand the structure.

What A Buyer Will Need From The Company

Selling from a company adds a layer of paperwork to the standard conveyancing pack. Have these ready:

• A board resolution authorising the sale and confirming who’ll sign on the company’s behalf
• Up-to-date Companies House filings, including the confirmation statement and accounts
• Identification for the directors and any person with significant control
• The company’s title to the property and any charges registered against it, which the lender will need to release on completion
• If tenanted, the tenancy agreements, deposit protection certificates, gas safety records, EPC and rent schedule

If the property is mortgaged in the company’s name, the lender will issue a redemption statement and their charge is discharged on completion, exactly as with a personal mortgage.

Selling Quickly With Tenants In Place

Company-owned rental properties are usually let, and vacating them before a sale takes months under the current possession rules. You don’t have to. A property can be sold with the tenancy continuing, and the buyer becomes the landlord on completion. If you’d like to sell to a trustworthy cash buyer that’ll purchase from your company with the tenants staying put, we’ll review the tenancy paperwork alongside the title, make an offer that reflects the property and its rental position, and complete on a date that suits the company’s plans. We’re used to dealing with corporate sellers, so the resolution, the ID requirements and the lender’s discharge won’t slow things down.

Timing And Tax Planning

A few points are worth raising with your accountant before you agree a sale date. The company’s year end affects which accounting period the gain falls into and when the corporation tax is due. If you’re planning to close the company afterwards, the sequence of sale, liquidation and distribution matters for the tax you’ll pay. And if you have other assets in the company that you intend to sell later, the timing of each disposal can change which corporation tax band applies. None of this needs to delay the sale, but a short conversation beforehand can save a meaningful sum.

FAQs

Does a limited company pay capital gains tax when it sells a property?

No. Companies pay corporation tax on the gain, at the rate applicable to their total profits for the year. There’s no annual exemption for companies.

Is it better to sell the property or sell the company?

Selling the property is simpler and suits most buyers. Selling the company can save the buyer stamp duty and avoid a second layer of tax for you, but it involves more due diligence and fewer buyers will consider it.

Can a limited company sell a property with tenants in place?

Yes. The tenancy transfers to the buyer, who becomes the landlord on completion. Cash buyers regularly purchase tenanted properties from companies.

How do I get the money out of the company after selling?

Through dividends, repayment of any director’s loan, or a capital distribution if you close the company. Each has different tax consequences, so take advice on the best combination.

What paperwork does a company need to sell a property?

A board resolution, current Companies House filings, ID for directors and persons with significant control, the title documents, and the tenancy paperwork if the property is let.

Do I need an accountant to sell a company-owned property?

There’s no legal requirement, and the interaction between corporation tax, extraction and any plan to close the company still makes professional advice well worth the cost.