How we sold half our rental properties without paying CGT

18 months ago my family and I relocated to our dream home in the Algarve, Southern Portugal. This had nothing to do with tax, it was always our plan because we are passionate golfers.

We first engaged Property118 to calculate our new base cost for Capital Gains Tax calculation purposes. The purpose of this was that we also planned to take life a little easier by reducing the size of our property business, i.e. selling some of our UK rental properties.

Our Property118 adviser went above and beyond calculating the numbers we requested. She created a plan which has been life-changing for us. The following is a short summary of that plan. First though, a bit of background.

We started buying rental properties in 1996 and obviously did very well out of the very buoyant property market and easy/cheap financing over that period to grow a very decent-sized business by most people’s standards. We stopped buying and taking on new mortgage debt when the credit crisis first came along. Since then our property values increased at quite a pace, resulting in our once highly geared property portfolio being transformed into a very modestly geared business.

Rather than selling anything immediately we first increased our mortgages to our new base cost for Capital Gains Tax calculation purposes and pocketed the cash. There were two reasons for this. The first was that we were not eligible for non-resident tax status when we first relocated. The second reason is explained below.

Based on advice from Property118, earlier this year we decided to sell our property rental business at full market value to our newly formed UK limited company in exchange for shares. Our capital gains were rolled into our shares in the new company.

The market value of our properties at that time became the new base cost to the company for the purpose of calculating the tax on future property sales.

We didn’t need to arrange any new finance to deal with the incorporation. Instead, our new company paid us in share premium and gave us an indemnity for our mortgage liabilities.

Not too long after our incorporation was completed we sold half of our properties and paid off most of our mortgages. The property market was as hot as its ever been at that point, so they all sold very quickly. The properties had not increased in value further because we had only recently incorporated them at market value, hence there was no further tax to pay.

We then loaned some of the money we had refinanced out of the business before we incorporated into our new company. Those funds were used to repay the balance of our mortgages. Thankfully we had not tied ourselves into mortgage products with early repayment charges.

We now have no mortgages at all and the company owes us the money we loaned to it. We can get that money out of the company tax-free in three ways.

1. sell more properties and use the sale proceeds to repay the money we loaned to the company
2. take loans on the properties (unlikely with current interest rates!) and use the sale proceeds to repay the money we loaned to the company
3. the company repays the loans we made to it over a number of years out of its retained profits

However, we will not need to do any of this for the next 10 years because we are able to take tax-free dividends out of the company until then due to our NHR resident status in Portugal.

We have decided to share our story as a thank you to Property118 for all their advice over the last few years. We cannot recommend them highly enough because we would never have thought of most of this by ourselves.

What was right for us might not be the perfect solution for other landlords but the one thing we can assure you of is that booking a tax planning consultation with Property118 was one of the best business decisions we ever made. The biggest mistake you will ever make is not booking a tax planning consultation with Property118. The question you should be asking yourself is this; how much will it end up costing me/us not to seek professional advice.

Our Property118 adviser asked us to leave a comment on the Property118 Testimonials page, but we decided to follow her lead and go above and beyond by submitting this article to share our very personal story.

Wishing you all the best and please accept our apologies for our anonymity, we are very private people.

Share This Article