Can you split Property Portfolio in two parts to Incorporate?

by Readers Question

13:18 PM, 25th February 2020
About a month ago

Can you split Property Portfolio in two parts to Incorporate?

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Can you split Property Portfolio in two parts to Incorporate?

We currently have 20 properties, 10 of them in Surrey where we live and remaining 10 in Ashford Kent around 47 miles from our home.

As we understand incorporation relief is only available if we incorporate whole of portfolio. We have met 3 of Accountants and 2 of them have agreed that we can split portfolio in two due to geographical reasons and form a separate business.

The way they have described to go about it is to form an LLP for 2-3 years transfer properties into LLP and submit partnership accounts and then Incorporate into LTD company in order to receive s162 relief. We do not want to incorporate whole portfolio due to potentially double taxation on extraction and the fact we have favourable terms on properties owned in Surrey. All properties are jointly owned between my wife and myself and fully managed by us too.

I understand that legislation is clear that whole business must transfer in order to benefit from s162 relief, but equally I believe that as long as it can be demonstrated that what constitutes a separate business then it should satisfy s162 criteria. I believe formation of LLP and partnership accounts for 2-3 years will be able to distinguish between 2 portfolios.

Any input will be greatly appreciated.

Simon

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Comments

Mark Alexander

15:54 PM, 25th February 2020
About a month ago

Hi Simon

I agree that if you transfer your properties into two separate LLP's then you could achieve your objective. However, if you remove property from an LLP within three years of transferring them in there is a Stamp Duty charge, so the advice you have been given in regards to "two or three years" is both vague and could potentially be very dangerous for you. It is worrying that two different accountants have both told you this, because the anti-avoidance legislation is very clear.

In regards to "profit extraction", have you looked into the possibilities for Capital Account Restructuring? Please see the link below, because this might solve your concerns in that regard.

https://www.property118.com/tax/capital-account-restructure-landlords/

Furthermore, you might be able to incorporate immediately, because from what you have said above it seems you may well already be a partnership by de-facto in accordance with the definition in the Partnership act 1890. Please see the link below.

https://www.property118.com/tax/stamp-duty-transferring-whole-business-partnership-limited-company/

Finally, are you certain that is you split the portfolio that you will not have a 'latent gains' problem in either of them? Please see the link below.

https://www.property118.com/tax/incorporation-relief-explained/

We will only know for certain what the optimal strategy is by going through a full consultation process, which costs £400 and comes with a GUARANTEE of total satisfaction or a full refund.

I hope that helps 😀

Simon Hall

17:29 PM, 25th February 2020
About a month ago

Mark, thank you for your kind input. You appear to be far more knowledgeable than Chartered accountants. I am aware that we should be able to incorporate immediately that is only if we incorporated the whole portfolio. The difficulty we have is that we have to separate/ split portfolio in 2 parts and we have to draw the line and the only way it can be achieved is by forming an LLP and putting income through partnerships accounts for those 10 properties which are intended to be incorporated and remaining 10 as they are.

If I have rightly understood, latent gains means in layman terms that your equity in properties should exceed Capital Gains. So in other words Let's say my acquisition costs are £2 Million pounds for part 2 portfolio (the portfolio which we intend to incorporate) then by the time we incorporate as long as the value of properties is say £2 Million and £1 then we do not have latent gains issue? (assuming Mortgages are £ 2 Million too).

Would you kindly clarify following:

1) Why have 2 LLP'S as we are looking to incorporate only 1 portfolio and the other leave it how it is.

2) Why you mention particularly 3 years rule of an LLP as both accountants mentioned 2-3 years? They have stated that there is not a minimum period by recommended time is 2-3 years.

3) Why anti-Tax avoidance apply to 2 years but not 3?

Many thanks Mark.

Simon.

Mark Alexander

17:52 PM, 25th February 2020
About a month ago

Reply to the comment left by Simon Hall at 25/02/2020 - 17:29
Hi Simon

Thank you for your compliments, flattery will get you everywhere!

Most of our clients are referred to us by accountants. We are specialists in this particular area whereas most accountants tend to be general practitioners in tax. We do not get involved with general accountancy such as bookkeeping, payroll, tax returns etc. Each to his own and horses for courses!

I concur with your initial interpretation, i.e. .... "latent gains means in layman terms that your equity in properties should exceed Capital Gains". If your equity is less that your Capital Gains PLUS any unused annual CGT exemption allowances PLUS any carried forward capital losses then you would have CGT to pay, even if you qualify for 'incorporation relief' under TCGA92/S162. However, I cannot endorse your example, because it does not contain sufficient information to establish whether latent gains applies or not.

If you are only looking to incorporate one part of your portfolio then you might only need to create one LLP to ring fence it. However, you also need to consider GAAR. There may may well be other reasons to consider forming two LLP's, such as business continuity and legacy planning, IHT planning, utilisation of adult children's lower rate tax bands etc.

Property moved into and back out of a Partnership within three years triggers SDLT. That is clear in the anti-avoidance legislation within the Finance Act 2003. Your other advisers are wrong.

There is still anti-avoidance which extends beyond three years. HMRC can refuse a claim for SDLT relief if they believe a partnership has been formed specifically to avoid paying SDLT upon incorporation, because that would fall into their General Anti Abuse Rules legislation "GAAR". That might be why your existing advisers recommended two LLP's, i.e. to be make it irrefutable that there are commercial reasons which extend beyond tax avoidance.

As a matter of interest, how much did you pay for the flawed advice you have received elsewhere?

Simon Hall

18:40 PM, 25th February 2020
About a month ago

Hi Mark,
Many thanks for that. The total purchase price of new portfolio which we purchased in last 4 years is around £3 Million, this is very same portfolio we wish to incorporate as it was a mistake! But we do not wish to get rid of it. So the acquisition costs are £3 Million and the total values are around £3.5 Million. We funded this portfolio by taking loans (second charges) against our Surrey properties.
So, what we intend to do is, after forming an LLP, we will remortgage all of these properties and take total mortgages equivalent to acquisitions costs by the time we incorporate and pay off all loans which we had secured against our Surrey portfolio which had paid for new portfolio deposits and stamp duty. As common sense would prevail, if we leave where those aforementioned loans tied up against surrey portfolio and we leave where they are then we will not be able to offset interest on those second charge loans?
So in summary, we will remortgage the portfolio up to acquisition costs. We would need around 2-3 years to resolve this issue and as you recommend 3 years for LLP then we stick to 3 years.
We are not doing it purely to Save Tax as our decision is also influenced by the fact that one of properties in Ashford is a Licensed HMO and distance involved is fair amount so we would like to minimise risks, polarise our portfolio, IHT planning and long term business plan. We are only at investigative stage, so we have not paid anything for advice Mark but we will indeed seek your services later down the line.
Does any of above cause you any concern? My strategy to take Mortgages equivalent to acquisition costs is right? How do we mitigate Anti-Tax avoidance concern as we genuinely not doing it purely for Tax reasons although it is certainly a contributory factor but not the only one.

Mark Alexander

19:08 PM, 25th February 2020
About a month ago

Reply to the comment left by Simon Hall at 25/02/2020 - 18:40
I think it would wrong and potentially dangerous to provide further bespoke guidance on a public forum and without completing a full consultation. However, I am pleased my responses to your more generic questions have provided you with confidence to progress to the next stage with the Property118 team when you are ready to do so.

If you want to get this set up for the tax year you will need to get a move on. I will not be available personally due to travel and holiday commitments from tomorrow through to 9th March but I can assure you that all Consultants within the team are equally knowledgeable and able to assist as I am.

Simon Hall

21:20 PM, 25th February 2020
About a month ago

Reply to the comment left by Mark Alexander at 25/02/2020 - 19:08
Thanks Mark it has been great help anyway. Just on generic terms, you mentioned any unused annual exemption allowances. Based on my understanding, you cannot carry forward unused annual exemption allowances? for avoidance of doubt, I am not suggesting that you said that.

Mark Alexander

21:36 PM, 25th February 2020
About a month ago

Reply to the comment left by Simon Hall at 25/02/2020 - 21:20
Correct, unused annual exemption allowances cannot be carried forward

Simon Hall

17:55 PM, 28th February 2020
About a month ago

Mark, I am looking for this reference: "Property moved into and back out of a Partnership within three years triggers SDLT. That is clear in the anti-avoidance legislation within the Finance Act 2003. Your other advisers are wrong."

I am unable to find it anywhere. Would you be kind to send me reference to aforesaid anti-avoidance legislation? Thanks

Mark Alexander

18:16 PM, 28th February 2020
About a month ago

Reply to the comment left by Simon Hall at 28/02/2020 - 17:55
Below is an extract from an email sent to me by Mark Smith of Cotswold Barristers on this subject. I hope this helps ....

FA 2003 Sch 17A (added by FA 2004 Sch 42)

17A(1)This paragraph applies where—
(a)there is a transfer of a chargeable interest to a partnership (“the land transfer”);
(b)the land transfer falls within paragraph (a), (b) or (c) of paragraph 10(1);
(c)during the period of three years beginning with the date of the land transfer, a qualifying event occurs.
(2)A qualifying event is—
(a)a withdrawal from the partnership of money or money's worth which does not represent income profit by the relevant person—
(i)withdrawing capital from his capital account,
(ii)reducing his interest, or
(iii)ceasing to be a partner, or
(b)in a case where the relevant person has made a loan to the partnership—
(i)the repayment (to any extent) by the partnership of the loan, or
(ii)a withdrawal by the relevant person from the partnership of money or money's worth which does not represent income profit.
(3)For this purpose the relevant person is—
(a)where the land transfer falls within paragraph 10(1)(a) or (b), the person who makes the land transfer, and
(b)where the land transfer falls within paragraph 10(1)(c), the partner concerned or a person connected with him.
(4)The qualifying event—
(a)shall be taken to be a land transaction, and
(b)is a chargeable transaction.
(5)The partners shall be taken to be the purchasers under the transaction.
(6)Paragraphs 6 to 8 (responsibility of partners) have effect in relation to the transaction.
(7)The chargeable consideration for the transaction shall be taken to be—
(a)in a case falling within sub-paragraph (2)(a), equal to the value of the money or money's worth withdrawn from the partnership,
(b)in a case falling within sub-paragraph (2)(b)(i), equal to the amount repaid, and
(c)in a case falling within sub-paragraph (2)(b)(ii), equal to so much of the value of the money or money's worth withdrawn from the partnership as does not exceed the amount of the loan,
but (in any case) shall not exceed the market value, as at the effective date of the land transfer, of the chargeable interest transferred by the land transfer, reduced by any amount previously chargeable to tax.]

So ….

1. if the proper SDLT was paid at the time of original purchase
2. no SDLT is payable on transfer to the partnership
3. but SDLT would be payable by the partners if the property was taken out of the partnership into NewCo within 3 years
4. on the difference between what was paid at stage 1 and the market value at stage 3.

Simon Hall

20:48 PM, 28th February 2020
About a month ago

Reply to the comment left by Mark Alexander at 28/02/2020 - 18:16
Many thanks Mark. So in layman terms, what you saying is that, if at the time of purchase I paid £10000 for stamp duty and then as an example at the time of transfer from partnership were to be £13000 Stamp Duty then you would deduct £10000 (original stamp duty payment) from £13000 leaving you to pay £3000 and that's if it was taken out of partnership less than 3 years from its set up and then transferred into company?

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