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Tax Planning For Landlords

Author

Sharon Collier

An experienced Chartered Tax Adviser and Trust and Estate Practitioner, Sharon joined ETC Tax in September 2016.

Restructuring an existing UK Property Business – Incorporation

Landlords who own their property portfolio’s in personal names may be currently considering transferring the portfolio to a limited company. The incorporation of the portfolio would be advantageous for the following reasons:

  • any rental profit generated would be subject to corporation tax at 20% rather than income tax at 40% (or 45%).
  • once established as a company, further IHT planning is possible. There are a number of strategies (see below) available which will depend on client’s circumstances.
  • On the transfer of all properties to the company, all properties would be treated for tax purposes as being acquired by the new company for the current market value, meaning that on any potential future disposal by the company of any of its properties, the gain chargeable would be limited to the growth in value from the date of acquisition by the company, to the date of disposal, in other words, the gain already accrued/enjoyed will be washed out.
  • The new loan interest restriction rules, being phased in from April 2016, that reduce the tax relief available for buy to lets owned personally, from 40%/45% down to 20% DO NOT APPLY to companies.
  • The new stamp duty land tax additional 3% rate for buy to let property and second homes should not apply to corporates, although this only being announced at the 2015 Autumn Statement may be subject to change.

The Problems

Established property portfolios are likely to have significant capital gains attached to each of the properties. If these properties are disposed of to the new company, this could trigger a capital gains tax liability at 28% of the gain.

Also, on the transfer of the properties, Stamp Duty land Tax at the prevailing rate could be charged.

The incorporation planning techniques employed by Enterprise Tax mean that no taxes will be triggered on the transfer of the properties to the new company.

Inheritance Tax (“IHT”)

Whilst incorporating the property portfolio brings with it many advantages (see above), it can also been seen as a stepping stone to being able to secure large IHT savings. As mentioned above the IHT strategies to be considered include:

  • Freezer Share Planning
  • Discretionary Trust Planning
  • Employee Benefit trust Planning
  • Debt Creation (“IOU”) planning

All of the above planning, which is bespoke to the clients circumstances, is implemented by our in-house team of Chartered Tax Advisers with many years of experience of advising owner managed businesses and property entrepreneurs.

Case Studies

Our clients who are property entrepreneurs usually face the same problems:

  • They would like to sell some of their portfolio to reinvest in better property or development deals, but the capital gains tax bill is large and prevents this.
  • They have built up property portfolio’s and now face a 40% Inheritance Tax bill
  • They would like to transfer property to the next generation (children and/or grandchildren), but the capital gains tax charge on the gift is significant

So in the worst case scenario they do nothing and the Government take 40% of the family’s wealth.

Whilst each individual’s circumstances are different, Enterprise Tax have developed a number of bespoke planning techniques that can help and save considerable amounts of tax.

Two examples are:

Client A held a portfolio of properties (7properties) worth approx. £1.1m
The capital gain tax if transferred to children was approx. £240,000
The Inheritance Tax exposure was £440,000

So a very difficult choice transfer now and pay £240k OR hold onto the properties but pay £440k in the long run.

Enterprise Tax were able to transfer the entire portfolio to a limited company WITHOUT triggering the £240k tax liability AND WITHOUT triggering the 4% stamp duty land tax charge of £44,000.

The company then sold 4 of the 7 properties for £560k “tax free” as when the properties are transferred to the company, base cost is uplifted to the current market value.

The £560k tax free proceeds were then used to buy, develop and sell properties. The IHT of £440k will be completely gone in 2 years.

Client B held shares in a property investment company worth £600,000

He wanted to transfer these shares to his daughter but the capital gains tax bill on transfer was £168,000 (£600k x 28%)

The potential IHT bill was £240,000

Enterprise Tax were able to put planning in place that allowed the client to transfer the shares to his daughter WITHOUT paying the £168k. The IHT of £240k will be saved within 7 years.

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