Difficulties remortgaging due to higher interest rates affecting lenders affordability criteria

Difficulties remortgaging due to higher interest rates affecting lenders affordability criteria

9:00 AM, 28th May 2023, About 11 months ago 14

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Many landlords are reporting that it has become increasingly difficult to remortgage as a result of higher interest rates affecting lenders’ affordability calculations.

Last week I spoke to one landlord whose mortgage interest is now greater than his gross rental income, even though the LTV across his whole portfolio is only 54%.

This is becoming an increasing problem for landlords who are coming out of low fixed rates and moving onto significantly more expensive SVR rates.

In many cases, the affected landlords have considered selling properties to reduce their gearing and exposure to higher rates, but what about Capital Gains Tax?

The good news is that incorporation re-sets the value of properties for the purposes of CGT.

HMRC manual CG65700 explains that …

“TCGA92/S162 applies where a person other than a company transfers a business as a going concern with the whole of its assets (or the whole of its assets other than cash) to a company wholly or partly in exchange for shares. Provided that various conditions are satisfied, see CG65710, the charge to CGT on the whole or part of the gains will be postponed until such time as the person transferring the business disposes of the shares.

The way the relief works in practice is that all or part of the gains arising on the disposals of the assets are ‘rolled over’ against the cost of the shares.”

What this means in practice is that landlords can sell properties post-incorporation without having to pay CGT that would otherwise have fallen due within 60 days if they had sold those properties without incorporating. This is because the Capital Gains are rolled into the company shares, so the CGT is not payable unless the company is sold, liquidated or wound up.

To establish whether incorporation is the correct path for you to follow please book a landlord tax planning consultation by completing the form below.

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Comments

Mark Alexander - Founder of Property118

17:48 PM, 31st May 2023, About 11 months ago

Reply to the comment left by SCP at 31/05/2023 - 17:30
What you have said is absolutely correct, equity exchanged for share premium at incorporation remains part of a persons estate and could be chargeable to inheritance tax on death if the value of the estate's personal IHT bands are exceeded.

That is why it is so important not to settle for an 'ordinary' share structure. If you do, the value of those shares will continue to appreciate in line with the equity in the company-owned properties. The same applies to the equity if you don't incorporate.

However, it is possible to freeze the value of shares, whereas it is not possible to freeze the value of equity in personally owned property. In a well-structured Family Investment Company "SmartCo", all growth can be attributed to a class of shares which isn't held by a human, so IHT ceases to be applicable on the value of that class of shares. Instead the 'Growth Shares' can be held in trust for the benefit of humans.

Lordship

14:29 PM, 3rd June 2023, About 11 months ago

What if the rules around tax change again?

SCP

15:27 PM, 3rd June 2023, About 11 months ago

Reply to the comment left by Lordship at 03/06/2023 - 14:29
Prima facie, such questions would be ignored on the grounds that it is comparable to what happens if we are destroyed because of a catastrophic event.
However, there is merit to it. I did put forward an example (Deed of Covenant re school fees). As soon as lots of people used it, it was stopped.
I think property118’s argument is that it is based on various principles stated in HMRC’s own Manuals.
How far you trust the Manuals and whether the cost of the scheme suits your circumstances.

Mark Alexander - Founder of Property118

15:46 PM, 3rd June 2023, About 11 months ago

Reply to the comment left by Lordship at 03/06/2023 - 14:29
Nobody knows what the future holds, which is why it is so imperative to take action whilst the rules allow you to do this. Future legislation can only regulate the future.

Incorporation is not a “scheme”, it is the right of every business owner.

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