Expat Landlords Tax Planning OpportunityMake Text Bigger
This is a case study of how a couple are able to convert a massive tax headache into a £5,000,000 tax planning opportunity. You can read about a similar structure being used by UK resident investors via this link.
When expats become non-resident for UK tax purposes the base costs of their rental properties automatically increases to the value as of 6th April 2015. Here’s an example:-
The acquisition costs of the rental properties owned by Mr & Mrs A were £3,000,000.
They have owned the properties for a considerable amount of time.
The value of the properties in their rental portfolio is currently £11,000,000 and they have mortgages of £5,000,000 secured.
In January 2017 they emigrated to Dubai on a 6 year work contract and became tax residents there.
They are now concerned about the effects of restrictions on finance cost relief on their rental property business and are considering incorporation.
If they had remained tax resident in the UK they would have had a problem known as “latent gains”. This is where CGT becomes payable at the point of incorporation on the difference between their mortgage balances minus their acquisition costs (AKA “base costs”), in this case £2,000,000. As they run their property portfolio as a business, the rest of their capital gains could be rolled into shares in the company they transfer the properties into by claiming incorporation relief – see this link to HMRC’s manual.
You can read HMRC’s definition of a rental property business via this link.
However, as a result of being non-resident their base costs automatically increase to the value of their properties as of April 2015, in this case £10,000,000. Not only does this wipe out the latent gains problem, it also provides a £5,000,000 tax planning opportunity.
The rules on incorporation relief are that the ‘whole business’ (or the whole business excluding cash) must be transferred.
On this basis it is possible for Mr & Mrs A to borrow a further £5,000,000 before incorporation and transfer the debt to their company, but retain the cash. The day after, they lend the £5,000,000 to their own company, which in turn repays the new borrowings.
Property118 Limited has a business relational with private funder which provides the short-term finance described above at very competitive rates.
The outcome of implementing this planning is that Mr & Mrs A will only pay corporation tax on their company profits (currently 19%) and don’t need to take taxable salaries or dividends from the company. This is because the company can repay their Directors Loans out of future profits to them instead, and they will not be taxed on those receipts because it isn’t income. The company will also be exempt from restrictions on finance cost relief. We have seen examples of this structure where effective rates of tax are reduced from over 40% to just 19%. We have also seen examples whereby effective rates of tax without using this structure would be infinite (i.e. tax would exceed profit) once the full effects of the finance cost relief are effective in the 2010/21 tax year.
In the example of Mr & Mrs A above there would be no Stamp duty payable on the transfer to the company either. This is because two or more people or entities who are conducting a business are a partnership under the Partnership Act 1890 – you can read more about this in HMRC manual SDLTM33110.
We are happy to consult on individual cases directly with clients or via professional advisers. If you are a professional adviser, please add your contact details to the booking form below and then provide details of your client in the Additional Notes section of the booking form. We are happy for professional advisers to retain the 1% commission from the private finance company. For direct clients we waive this commission to discount the cost of borrowing. Property118 Limited does not pay commission or take commission from third parties in regards to this particular form of tax planning. We work on a fixed fee basis and initial consultations come with a guarantee of total satisfaction or a full refund. Implementation of the structures we recommend is via Mark Smith, Barrister-At-Law and Head of Chambers at Cotswold Barristers.Show Book A Tax Planning Consultation
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