Government BTL tax changes – workarounds

by Readers Question

22:19 PM, 12th September 2015
About 3 years ago

Government BTL tax changes – workarounds

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Government BTL tax changes – workarounds

I have always purchased my investment properties through a limited company so am quite lucky I suppose in that I don’t see any impact on my business with the potential government changes (my turn will come I’m sure). Government BTL tax changes - workarounds

However, I was thinking last week on what would I do if I was in the shoes of you guys out there who have bought property in your own names. I would create a new ltd co that would lease the BTL property from myself at a rate that would be at close to cost (mortgage cost).

The ltd company would be the separate legal entity that would appear on the ASTs and all rents, expenses etc would go through the bank account of the new ltd co.

All costs would be deducted in the normal way against rental income and corporation tax would be paid at the standard rate.

The personal taxation would not change as there is no profit on the lease.

There would be a personal tax liability on the dividend income but the chancellor would take less of a slice this way.

Has anyone done this or maybe it’s been raised on the forum and I’ve missed it?

Thanks

Laurie



Comments

Mark Alexander

22:35 PM, 12th September 2015
About 3 years ago

Hi Laurie

Your proposed structure would not work between a company and an individual landlord. This is because the landlord would need income to pay his/her mortgage. That income would be taxable and the finance costs could not be offset.

There are four tax planning strategies that I am aware of, however, they are probably not cost effective to implement for portfolio's worth less that £5million due to fees being a minimum of £50,000. For details see >>> http://www.property118.com/tax-efficient-incorporation-landlords/77519/

I am unable to share details of these tax planning strategies because I am bound by a very tight NDA with the professional advisers I am working with.
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Jon Pipllman

9:04 AM, 13th September 2015
About 3 years ago

Whatever you do as your attempt to mitigate these tax changes, never mention to anyone at all that the changes you make are anything to do with tax (let alone driven by tax)

The very last thing you want is for HMRC to suggest that your scheme is a construct to avoid tax and treat it as such

Read up on GAAR

Always take proper professional advice (and expect to pay for it) specific to your own circumstances and, ideally, with robust insurance in place to cover any claims about reduced tax liability

If a scheme suggests that it will reduce tax, but is not guaranteed, tread warily and be as sure as you feel you need to be before risking all the potential tax savings and fees

IMO for anything that claims to avoid SDLT, tread especially lightly: the track record of HMRC in dealing with SDLT avoidance plans is rather impressive - it doesn't miss much SDLT money that it thinks is due

For instance, I wouldn't want to be first to test at tribunal if it is OK to push properties through any sort of partnership into a company to avoid SDLT, whatever the broader changes around structure and workload on the Directors / employees of the new arrangement are.

If you do take steps to avoid the new tax liability, I wish you well with it. If you are expecting it to be easy or cheap (in £, time or effort) to achieve and maintain, you are probably mistaken.

Mark Alexander

9:19 AM, 13th September 2015
About 3 years ago

Reply to the comment left by "Jon Pipllman" at "13/09/2015 - 09:04":

I completely agree with you on the point of taking insured professional advice.

The law regarding tax avoidance was clarified nearly 80 years ago.

In 1936 a landmark legal case was heard in the House of Lords (Inland Revenue Commissioners v Duke of Westminster [ 1936 ] AC1 (HL)). The Duke of Westminster won the case. The judge, Lord Tomlin, stated:

“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax"

The latter part of Lord Tomlin’s statement could so easily be applied today to the unpopular tax strategies used by the likes of Amazon, and indeed the advice that landlords could be made privy to.

Incorporation of a partnership legitimately avoids SDLT. For sole traders who are married it is not difficult to create a partnership by transferring part of the beneficial ownership of a property to a spouse via a declaration of trust - see >>> http://buytoletconveyancing.co.uk/declaration-of-trust/

Once HMRC recognise your business as a partnership it's time to seek professional advice on incorporation relief to avoid CGT. Better still, obtain the correct advice for the entire process before doing anything - see >>> http://www.property118.com/tax-efficient-incorporation-landlords/77519/

SDLT and CGT only become payable when an asset is actually transferred. This may not be necessary - see http://www.property118.com/tax-efficient-incorporation-landlords/77519/

Finally you need to consider the costs of refinancing. If you don't actually transfer the legal ownership of the asset or change/affect the lenders security then there may not be a need to refinance - again see >>> http://www.property118.com/tax-efficient-incorporation-landlords/77519/

The tax planning strategies our advisers recommend are enshrined in law and have been used for several generations by gentry, they are not something new or untested, neither are they DOTAS schemes such as SDLT schemes and Film Partnership arrangements you may have come across.

There are no less than four strategies available.

The advice itself only costs £5,000, it is the implementation that costs the rest.

The above really is as much as I can divulge publicly.
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Jon Pipllman

9:38 AM, 13th September 2015
About 3 years ago

There are arrangements that I can see would work for some people. There are some that I have seen that are borderline and some that are non starters (all equally expensive by the way).

GAAR changes the rules on tax avoidance considerably. Indeed, the 1936 Duke of Westminster case is specifically mentioned and is no longer quite so set in stone as it was pre GAAR

It is worth reading up on GAAR and thinking where it might lead to in future

The Westminster case is specifically cited in B2.2 (page 4)

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/399270/2__HMRC_GAAR_Guidance_Parts_A-C_with_effect_from_30_January_2015_AD_V6.pdf

I will leave this thread with a repeat that both Mark and I are correctly making: seek proper professional insured advice specific to your own circumstances. Make sure you wholly understand that advice and the answer to as many variants of the question - what happens if...?

Do not make significant changes to the way you structure and run your business based only on something you have read on a forum

Mark Alexander

10:07 AM, 13th September 2015
About 3 years ago

Reply to the comment left by "Jon Pipllman" at "13/09/2015 - 09:38":

Hi Jon

Yes I agree that any landlords considering tax planning "schemes" should ask all of the questions you have raised and also familiarise themselves with GAAR.

The following paragraph is particularly useful:-

B4 What the GAAR is not targeted at

B4.1 Just as it is essential to understand what the GAAR is targeted at, so it is equally essential to understand what it is not targeted at.

B4.2 Underlying the GAAR legislation is the recognition that, under the UK’s tax code, in many circumstances there are different courses of action that a taxpayer can quite properly choose between. The GAAR is carefully constructed to include a number of safeguards that ensure that any reasonable choice of a course of action is kept outside the target area of the GAAR.

B4.3 To take an obvious example, a taxpayer deciding to carry on a trade can do so either as a sole trader or through a limited company whose shares he or she owns and where he or she works as an employee. Such a choice is completely outside the target area of the GAAR, and once such a company starts to earn profits a decision to accumulate most of the profits to be paid out in the future by way of dividend, rather than immediately paying a larger salary, is again something that should in any normal trading circumstances be outside the target area of the GAAR.
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tom brady

13:19 PM, 13th September 2015
About 3 years ago

could someone advise if paying btl profits into a pension is one way to reduce your tax bill?

James Fraser

16:49 PM, 14th September 2015
About 3 years ago

In reply to Laurie's original post...

Hi Laurie.

It's funny you should suggest that. Around two years ago one of the most respected property accountants in the business explained and recommended this exact plan to me, precisely as you describe it. The problem Mark brings up - that mortgages remain in your own name - was previously mildly problematic but could be dealt with via mortgage hosting and deeds of trust. It was, therefore, quite a good plan.

The big problem with this now is that given the government's recent announcement on their plan to destroy the private landlord, I strongly doubt they would allow this arrangement as the mortgages would presumably still be subject to the new rules which of course make the model you suggest unworkable. However, I am yet to check this out with the professional that originally suggested it. If he can find a way to use it Id still be extremely interested, but I'm not sure such good news exists at the moment!

Saeef Khan

18:21 PM, 14th September 2015
About 3 years ago

Reply to the comment left by "James Fraser" at "14/09/2015 - 16:49":

James, if it does work, would you kindly share this professional's details with us?

Thanks

James Fraser

18:42 PM, 14th September 2015
About 3 years ago

Reply to the comment left by "Saeef Khan" at "14/09/2015 - 18:21":

Yes, absolutely.

I have yet to make an appointment with him because he's 200 miles from where I live and Im researching other options for going forward, but if I get any good news in due course, believe me I'll be on here shouting it from the rooftops!

Mark Alexander

10:16 AM, 15th September 2015
About 3 years ago

Reply to the comment left by "tom brady" at "13/09/2015 - 13:19":

Hi Tom

You need net RELEVANT earnings (my emphasis) to make pension contributions. Rental profits are not "relevant" but if you have income from other sources then it could be a good way to reduce tax and make provisions for your retirement.

Please take professional advice - see >>> http://www.property118.com/tax/
.

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