Deed of Trust to Spouse or Ltd Company to reduce Tax?

Deed of Trust to Spouse or Ltd Company to reduce Tax?

9:03 AM, 5th January 2022, About 2 weeks ago 11

Text Size

I am a high rate income taxpayer with 3 Buy to Let properties in my sole legal name. All three properties have an outstanding mortgage on them. I am a UK citizen married to a US Citizen, we are both UK residents. My spouse and I both own a Ltd company.

My spouse takes a very small salary from our Ltd company, which keeps his tax situation to nil. He has no other employment. I don’t take any salary from our Ltd company, but I am employed by another company and pay the highest rate of income tax. I also currently declare all the rental income from my properties and of course pay income tax on the rents at the higher rate.

I want to sell all three buy to let properties in the tax year 2023 – 2024 and so want to act now ahead of tax year 2022 – 2023 to help reduce Capital Gains Tax when I come to sell. I also want to reduce income tax on the rental income for 2022 – 2023 tax year.

My question is what is the best way to do this, minimising Stamp duty, CGT and other taxes? Can I use a deed of trust to transfer the “benefit” of the properties to my spouse or our Ltd company ahead of April 2022 whilst remaining the sole legal owner? Will this mean that when it comes to selling the properties, my spouse or the business would pay CGT at their rate on the full taxable gain since the original purchase of the properties or will they only pay CGT on the taxable gain since they became the beneficiary and I must still pay CGT on the taxable gain from the original purchase date to when we signed the Deed of trust?

Finally, are there benefits to transferring the benefit of the properties to our Ltd company now and then selling them in 2024, or would it be better to transfer the benefit to my spouse? I understand there is no GCT to pay if I transfer benefit to my spouse, but not sure if stamp duty is payable or what might be the benefits or disadvantages of making our ltd company the beneficiary.

The total taxable gain on the properties is around $300,000 today, the total sale value of all three properties would be around £750,000 in today’s market and there is currently around £310000 in mortgage to be paid off when we come to sell. Obviously, these numbers will change over the next two years.

Thank you.

Tif



Comments

by Alex

9:36 AM, 5th January 2022, About 2 weeks ago

Hi Tif

If I understand correctly, your aim is to sell your three properties over the next couple of years and to minimise the effects of Capital Gains Tax upon their sale, as well as to reduce your exposure to Income Tax in the meanwhile.

This is perfectly achievable. Your Capital Gains Tax liability upon their sale could even be reduced to zero.

The important question to ask is; what do you want to do with the proceeds of sale? That will determine the best course of action for you to take now.

In any case, you will need very specific advice that cannot be provided on an open forum. I therefore recommend that you book a Property118 Tax Consultation and look at this from all angles.

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

by Helen @ Like-Clockwork

10:06 AM, 5th January 2022, About 2 weeks ago

Hello Tif,

Also worth considering how any benefits impact your spouse's future US tax returns and liabilities.

Good luck with it all!

by Simon Lever

10:09 AM, 5th January 2022, About 2 weeks ago

Hi Tif

As stated by Alex it is essential that you get advice about the best course of action. Each set of circumstances are different and therefore advice on this forum can only be generic and not specific.

First port of call would be your Ltd company accountant to see what they recommend. If they are not specialists then a Property 118 consultation is good value for the cost and will give you a clear idea of where you should be heading.

Initially it would make sense to transfer some of the property income to your spouse to take advantage of the lower tax rates. For husband and wife a transfer of just 1% of the property would transfer 50% of the income to the spouse. This retains almost all of the capital with the original owner. A deed of trust would probably be the best way to do this.

This also gives better tax relief for any mortgage interest as for a basic rate taxpayer relief is effectively given at 100%.

Transferring properties to a limited company is probably not the way to go in the short term. There would be SDLT to pay on any transfer and also capital gains on the sale to the company. Whilst any further gains until the date of ultimate sale would only be taxed at 19% or 25% in the company there would be further tax to pay to extract the funds from the company.

Putting property into a trading company could also affect a claim for entrepreneurs’ relief if the company were to be sold around the same time.

As a side note are both you and your spouse taking advantage of the £2,000 per annum 0% dividend tax on your company?

Spreading the sale of the properties over 2 or 3 tax years would give you the use of multiple annual allowances reducing the tax payable. This should be possible to achieve with a little planning.

As you can see specific advice and planning is needed. It will be money well spent to plan correctly as the tax savings will far outweigh any cost of the advice.

by DSR

11:08 AM, 5th January 2022, About 2 weeks ago

Reply to the comment left by Alex at 05/01/2022 - 09:36
I am looking purely for IHT advice as a result of properties being held within the family. I need to understand the options available given our specific circumstances before making any firm decisions about a course of action. Are free initial consultations available to make the options clear first, before we commit to a specific path?

by Alex

11:17 AM, 5th January 2022, About 2 weeks ago

Hi DSR

Property118 can provide you with all the IHT advice that you need. We do not offer free consultations, but a Property118 tax consultation only costs £400 inc VAT, which is likely to be a fraction of a fraction of a percent of the benefits you can enjoy.

You will not be committing to any 'specific path' as a result of your Property118 Tax Consultation, although it will provide you with all the information you need to make informed decisions about what you wish to do and why.

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

by Helen @ Like-Clockwork

11:20 AM, 5th January 2022, About 2 weeks ago

Reply to the comment left by Alex at 05/01/2022 - 11:17
Alex, out of interest, do Property118 take into account any other taxation jurisdictions (as in this case, USA)? Given that a US citizen is required to file a tax return regardless of where they live in the world, it's a big consideration for many of our clients. We usually use CPA/Accountants who have expertise in both UK and US tax matters.
Thanks!

by Alex

11:26 AM, 5th January 2022, About 2 weeks ago

Hi Helen

Property118 does not provide accountancy advice, or accountancy services, so all matters relating to accounting would be referred back to the client's Accountant in any case. We work 'hand in glove' with clients and their Accountants, not separately from them.

It would not be possible to have detailed legal knowledge of every tax jurisdiction in the world, especially not within such a small fee! Property118 and Cotswold Barristers have unparalleled knowledge of legal matters relating to property tax consultancy for the United Kingdom only.

by Helen @ Like-Clockwork

11:45 AM, 5th January 2022, About 2 weeks ago

Reply to the comment left by Alex at 05/01/2022 - 11:26
Thanks Alex!

Surely IHT advice would require some knowledge of other tax jurisdictions? Or would you refer to an appropriate advisor?

I was talking with a US citizen in Australia, who's discovered she's required to declare and pay CGT to the US govt on the recent sale of her property in Australia. She wasn't aware of this, nor were her advisors in Australia it seems...too late now!

by Alex

12:03 PM, 5th January 2022, About 2 weeks ago

Hi Helen

Like I said, it would not be possible to have detailed legal knowledge of every tax jurisdiction in the world, so for overseas clients we would refer them back to their own Accountant or tax specialist in their country of residence.

However, it's worth repeating that Property118 and Cotswold Barristers have unparalleled knowledge of legal matters relating to property tax consultancy for the United Kingdom.

It is not necessary to know everything about every other country in order to plan for UK Inheritance Tax. In the majority of circumstances, it can be entirely separate. The example you have illustrated is that of disposal, which is not the same as planning.

by AP

7:44 AM, 8th January 2022, About A week ago

You should ensure you get proper advice from an accountant who understands both the U.K. & US tax systems. I will say it’s a nightmare to find a reliable one who is not part of a massive company that then charges a fortune. There may be issues with creating a foreign trust from a US persepective?
Your spouse should be filing IRS returns every year whatever they earn, especially if you start filing U.K. returns (& the FBAR if they have a bank account here which ever goes over $10,000). It sounds like you should also file form 5471 for foreign ltd companies - make sure the accountant understands the category filer rules if you are joint shareholders.
If you have children though, it can end up that you have no tax to pay in the US (U.K. tax rates are generally higher) and you also get a rebate of a couple of thousand dollars from Child tax credit. So despite the hassle, worth doing!
Be aware that if your spouse owns / Co-owns your principal primary residence, when you come to sell it CGT will be due on their share in the US as it’s seen as a foreign property (and none has been taken here to offset). This is what Boris Johnson a big argument with the IRS about when he was London mayor. He eventually quietly paid up…

1 2

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

BECOME A MEMBER