Why tax advice is so important BEFORE you sell any rental properties

Why tax advice is so important BEFORE you sell any rental properties

16:25 PM, 10th February 2023, About A year ago 10

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Just because I’m selling several (but not all) of my properties doesn’t mean you should.

There are several reasons you might be selling your rental properties, here’s a list of the ones I hear most often: –

  1. I’ve had enough of landlords being vilified by Governments, so-called housing charities, and much of the mainstream media
  2. Interest rate rises are crippling my business
  3. Section 24 tax is unfair and crippling my business
  4. Selective licensing is nothing more than a money-raising scam for local authorities, does nothing to improve quality, and reduces supply
  5. It is taking much longer and is far more difficult to end relationships with poor payers and disrespectful and anti-social tenants
  6. the policy of the Government is refusing to pay housing-related benefits directly to landlords wherever possible
  7. The sector is over-regulated and biased toward tenants’ rights
  8. Government chases the votes of tenants because there are more of them than there are landlords
  9. The plan was always to take life a bit easier eventually. That time has arrived and the plan now to sell a few properties and pay off mortgages has finally arrived

There are of course many more reasons I could add to the list above, but if you ask any landlord who has finally decided to throw in the towel why they arrived at their decision they are likely to include at least two or three of the reasons I’ve stated above.

It’s IMPORTANT to plan your exit

Whatever the straw that broke the camel’s back, landlords must never act only on impulse. Unfortunately, most do though, especially when their decision is to sell. The red mist has descended and they cannot think clearly, so they walk blindly into a trap that’s very dangerous to their wealth. That trap is called Capital Gains Tax and it often hits them like a speeding train when they least expect it. However, with careful thought, planning, and professional advice there are often a variety of opportunities to reduce or sometimes completely mitigate CGT. For example: –

  • Changing the ownership share of the property between spouses to fully utilise annual CGT exemption allowances or to pay the lower rate 18% of CGT as opposed to the 28% rate
  • Timing your property sales to span tax year ends or to sell in years when you are more likely to be a lower rate tax payer
  • Incorporation of your property rental business as a going concern, which can re-base the value on which capital gains are calculated by washing the gains out of properties into company shares so that you can sell some properties to pay down mortgages on others with significantly less and possibly even no tax to pay at all
  • Emigrating to tax-haven which doesn’t charge CGT on overseas capital gains can be particularly efficient if a significant proportion of your capital gains occurred prior to 2015

The above list is by no means exhaustive either, so if you are planning to sell any or all of your rental properties please get in touch with us first by completing the form below.

if you wait until you’ve already exchanged contracts or completed the sale it’s too late.

There are also reasons you shouldn’t sell all the geese that lay the golden eggs

I have no doubt the UK will always have a Private Rented Sector and the property market will continue to be a safe haven for investment growth, so it is absolutely not true that all landlords will sell up regardless of what the media might tell us. In fact, there are newcomers to the market every day and our Landlord Tax Consultants are always pleased to help them create the most efficient ownership structures for their investments. Either way, whether you are buying or selling, we are here to help.

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  • For the avoidance of doubt, we are able to assist landlords who own properties in England, Northern Ireland, Scotland and Wales. Where you reside is not a problem, even if you are resident outside the UK.
  • Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).

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Comments

Mick Roberts

5:36 AM, 5th February 2023, About A year ago

Great words in this new article, I'm going to save it for tenants & the authorities when they need explaining why rents are high & they can't get a house.

Mark Alexander - Founder of Property118

1:33 AM, 6th February 2023, About A year ago

Reply to the comment left by Mick Roberts at 05/02/2023 - 05:36
Thanks Mick. You might also wish to share this one …

https://www.property118.com/facebook-debate-with-a-landlord-hater/

Mick Roberts

6:59 AM, 6th February 2023, About A year ago

Reply to the comment left by Mark Alexander - Founder of Property118 at 06/02/2023 - 01:33
Yes,

Just commented on that one.

Lordship

15:13 PM, 9th February 2023, About A year ago

Just to be clear for those that are considering the suggestion to incorporate. Unless you are running your BTL portfolio as a partnership (with another person who also devotes 20+hrs a week to the business and has been for at least 3 yrs) you would be liable for SDLT so you would need to run the numbers.
But as Mark suggested, there are some other options that could save you some money as far as CGT is concerned.

Mark Alexander - Founder of Property118

16:01 PM, 9th February 2023, About A year ago

Reply to the comment left by Lordship at 09/02/2023 - 15:13
Whilst I appreciate your comment was well-intentioned, it is not entirely accurate in regards to your 20 hours and Partnership interpretations.

A link to the HMRC manuals explaining the full detail can be found below.

20 HOURS

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65715

PARTNERSHIPS

https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm132400

"It is sometimes overlooked that there is no need for the spouse or civil partner to contribute capital; or to participate in management; or, in a trading context at least, to be capable of performing the main activity of the business. Indeed to be a partner one need not take an active part in the business at all."

Lordship

16:15 PM, 9th February 2023, About A year ago

Reply to the comment left by Mark Alexander - Founder of Property118 at 09/02/2023 - 16:01
Ok Mark, thanks for putting the record straight.
However, If your wife/partner is not named on the mortgages has had nothing to do with the portfolio, then if I have understood things correctly you can't then set up a partnership to then incorporate?

Mark Alexander - Founder of Property118

16:24 PM, 9th February 2023, About A year ago

Reply to the comment left by Lordship at 09/02/2023 - 16:15
Again, not so. Please read the HMRC manuals linked above, in particular the second one

Lordship

16:51 PM, 9th February 2023, About A year ago

Reply to the comment left by Mark Alexander - Founder of Property118 at 09/02/2023 - 16:24
Interesting Mark.

Sounds like I have been ill advised. I was told as I'm not married and not in a civil partnership and my partner has no connection to my property portfolio, financially or work related (we are not already in a partnership for at least 3 years) I would need to pay SDLT if I now wanted to incorporate.

So I guess even a single person could form a partnership in order to incorporate and potentially save the CGT.

I think I will need to look into things again before I sell a couple of properties! Thanks.

Mark Alexander - Founder of Property118

17:08 PM, 9th February 2023, About A year ago

Reply to the comment left by Lordship at 09/02/2023 - 16:51
Based on that explanation I think you have been advised correctly.

Mark Alexander - Founder of Property118

18:12 PM, 10th February 2023, About A year ago

Reply to the comment left by Lordship at 09/02/2023 - 16:51
Further thought, have you sought professional advice on how much the SDLT would cost you to incorporate?

If it works out to be less than you would save on CGT it could still be a viable option for you.

There are, of course, many other factors to consider. You shouldn't make a decision based entirely on a short-term problem. You also need to consider your longer-term objectives and the ownership structure that is optimal for those bigger-picture objectives.

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