Would a multiyear Incorporation avoid CGT?

Would a multiyear Incorporation avoid CGT?

9:02 AM, 19th February 2019, About 5 years ago 4

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The problem I am trying to solve is exit of BTL Property minimising Capital Gain Tax.

Mr James owns in his individual name a BTL property worth £250,000 and purchased at £150,000 so if the property is sold the Capital Gain is £100,000 and the Capital Gain Tax is £28,000 for a high tax payer.

Mr James can do a down payment from savings to make this property mortgage free and then:

1. Gift 50% of the property to wife, this would be exempt of CGT and SDLT.

2. Transfer the property from joint names into limited company into several transactions in multiple years:

– Year 1: Transfer 23% of the property into LTD company. Capital Gain is £23,000 for Mr James and Spouse (£11,500 each) but they can use their annual allowance and pay ZERO CGT. The funds introduced in the LTD company to enable the purchase go as Directors loans, so they can extract the cash in the future sale Tax Free.

– Up to year 4 to 5: Repeat the transactions until the limited company owns 100% of the property.

Implication of this strategy:

1. The transfers to ltd company would be charged with SDLT as “linked transactions” the total SDLT tax payable over £250,000 is £10,000.

2. Assuming the company sells the property at a market value of £250,000 no tax will be payable.

3. The savings of this strategy being £18,000 (vs selling in individual name)

Note that you don’t need to wait until the company owns 100% we can sell on market when the company owns just around 80% and still be CGT free.

I like this ideas as even though I pay 10K of SDTL tax, I can do an overall save of 18K and I have the money ready to be extracted from the ltd company through a directors load. Which does not seem possible with other ideas like the incorporation in exchange of shares.

I appreciate any feedback from any reader!

THANK YOU

 


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Comments

Mark Alexander - Founder of Property118

9:31 AM, 19th February 2019, About 5 years ago

If you would like to book a tax planning consultation via the link below it will cost you £400 but I will then be able to obtain Counsel's opinion on your proposed strategy from Cotswold Barristers at no additional charge.

https://www.property118.com/tax/

If your proposal is indeed within the bounds of legitimate tax planning and isn't considered to fall foul of the GAAR regulations, then Cotswold Barristers will also be able to quote you fees for the legal work associated with the transfers and dealing with the SDLT returns.

Mark Alexander - Founder of Property118

9:50 AM, 19th February 2019, About 5 years ago

PS - if your strategy is viable, you savings would be £25,000, not £15,000. This is because the Stamp Duty would fall due either way.

Beaver

10:42 AM, 20th February 2019, About 5 years ago

If I remember correctly, if one of you makes the home your principle private residence, whilst the CGT is apportioned in terms of the number of years you lived in it versus the number of years you rented it (has either of you ever lived in it?) you are as I remember allowed a £40K uplift. So I think the taxable gain might be £100K, less £40K, less £11,700. If one of you earns less than the other that might make a difference.

Somebody else correct me if I remembered anything wrong.

Simon Lever - Chartered Accountant helping clients get the best returns from their properties

15:50 PM, 23rd February 2019, About 5 years ago

Initial advice is run it past your own accountant for his/her views. That is what they are there for.

If you transfer a proportion of the property to your wife before you sell it directly the CGT would be maximum of £21,560 at current rates, less if one of you is a basic rate taxpayer.

For the various reliefs if the property was a principal private residence (PPR) then the last 18 months of ownership plus any period of PPR before the last 18 months would reduce the CGT by a proportion of PPR + 18 months over total period of ownership. Also lettings relief of up to £40,000 per taxpayer would be available. There is a formula for how to calculate lettings relief which is the lower of 3 different figures. However making a property a PPR is not as straight forward as it may seem and professional advice should be taken on this.

Also need to consider removing tenants if it is already let. Is this practicable?

Whilst the property is being transferred year by year to the limited company rent would have to be received by the limited company in proportion to its ownership unless the limited company and Mrs & Mrs Jones are in LLP in which case the rents can be paid in any proportion that is agreed by the partners.

In 5 years time the value of the property should have increased so the capital gain on which the company pays tax would be higher although the tax rate will most likely be at only 17%.

If the overall aim is to sell the property with as little tax to pay as possible the scheme may work. However it seems a convoluted method to save £11,560 (£21,560 - £10,000) plus any additional CGT payable by the company in 5 years time.

This is a case where you “have to do the math” and see if the saving is worthwhile. Also you would have to consider if you could make more money by taking the total proceeds now and investing them elsewhere for the 5 years.

As I said at the start – take professional advice (which this is not!)

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