How we restructured to become debt free and super tax efficient

How we restructured to become debt free and super tax efficient

16:02 PM, 9th June 2023, About 4 months ago 14

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On paper, my spouse and I were worth £3,000,000 but the reality was that we had no savings, no money whatsoever to live on after paying our tax bills, and this was despite having rental income of £300,000 a year coming in. In fact, it was even worse than that, our tax bill exceeded our income by a very significant amount!

These were our numbers before we took action: –

Property portfolio value £6,000,000

Mortgage outstanding £3,000,000

Net equity £3,000,000

Capital gains £3,000,000

Rental income based on a 5% rental yield of £300,000

Mortgage interest based on a 6% interest rate of £180,000

Other costs of business £100,000

Profit £20,000

Two years ago our profits were £140,000 because we were only paying 2% interest rates.

We knew this would happen one day but to be honest we spent far too much time with our heads buried in the sand.

Now here’s the craziest thing, our income for tax purposes had not changed due to section 24.

Our taxable income remained the same at £200,000 a year. This was because we could not offset finance costs.

It doesn’t take a rocket scientist to work out that the tax on £200,000 a year is greater than the £20,000 of profits we were left with.

How were we supposed to live?

What could we do?

Our first idea was to sell half the properties and pay off all the mortgages. We factored in 3% for selling costs and lost rent, so £3,000,000 less 3% would leave us with £2,9010,000.

The problem we initially didn’t consider was Capital Gains Tax at 28% until we spoke to our Accountant.

He calculated that after factoring in selling costs, the capital gains we would have crystallised by selling 50% of our property rental portfolio would have been £1,410,000.

The tax on that would have cost us £394,800, so we would have been left with £1,015,200 to reduce our remaining mortgage balances of £1,500,000.

In other words, we could end up with a mortgage of £584,800 which would continue to cost us £35,088 a year (if interest rates had stayed as they were at 6%). As we know, interest rates are still going up.

We would still have had £150,000 of rental income coming in and by selling half of our properties our other costs would have halved too, so we would be looking at around £100,000 of taxable profit before finance costs of £35,088 a year. We felt we were getting somewhere because the outcome of all of this would have been real profits of £64,912 a year and our taxable income would have been calculated at £100,000, but we would still be skint, up to our necks in debt and remain exposed to interest rates going up even further. It was from a good feeling.

That’s when our Accountant introduced us to the Property118 tax team.

Step one of their recommendation was to form a Limited Company and then sell our entire rental property business to that company at the full market value of £6,000,000.

The consideration for tax purposes was £3,000,000 of shares and a further £3,000,000 indemnity for the debt.

No refinancing was required and we didn’t need to pay Capital Gains Tax or SDLT because we are a business Partnership by de-facto.

Property118’s fees for this were £6,000 and we had a further £13,000 of legal fees to pay. We borrowed money from Tesco Finance to pay those costs.

The capital gains still existed, but instead of being attached to our properties they were now attached to our shares and we had no plans to sell those.

We went on to sell just over 60% of our properties and didn’t have any CGT to pay whatsoever, because the values had not increased beyond what the company paid us for the properties. This meant that we had enough money left over to pay off all our mortgages and the Tesco Finance loan and still keep a chunk aside for a rainy day.

We are now completely mortgage free and I cannot begin to tell you how liberating that feels.

We are now making a reasonable profit, we pay ourselves a small salary to use up our personal allowances and that salary is deducted from our company profit for tax purposes. We also decided to pay our children a salary for the same purposes. They both go to University but will help us to redecorate our student-let properties in the Summer holidays. In the fullness of time, we are hopeful they will take over the business fully.

Here’s what our business looks like now: – 

Property values £2,400,000

Mortgage £nil

Cash at bank £450,000 (further peace of mind we didn’t previously have)

Rental income £120,000

Salaries £12,570 a year each X 4 (tax-free)

Other business costs at 33% of rental income £40,000

Profits retained annually in the business which are taxed at 19% = £30,000

The ability to do some extra work on the side if we choose to do so, without being pushed back into that horrible position of being higher rate taxpayers affected by Section 24 tax ever again!

Our longer-term plans are to go and live abroad somewhere. At that point we will no longer be UK tax residents, so we will not need to worry about CGT on our shares if we decide to sell them to our boys at that point. We will probably loan them the money to buy us out, which in reality will be a paper exercise. The company will pay us for those shares out of its future profits. We may well charge interest on that loan too, because that could reduce the profits for the business and HMRC will not tax us on that interest as non-residents. We will take further professional advice from Property118 if and when we do go down that route, but at the moment the prospects of moving to Dubai or Malta are becoming increasingly luring.

That said, if rents continue to go up, property values continue to go down and financing becomes viable again we might just be persuaded to dive back in again, leverage up our business and build our portfolio back up. Or perhaps that’s what the boys will do? Choices, choices, choices!

The bottom line is this, if you’re feeling trapped we highly recommend you book a tax planning consultation with the Property118 team. Their expertise and advice have quite literally been life-changing for us.

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10:48 AM, 9th June 2023, About 4 months ago

Can i just ask, because im not an expert, but I am in the same position as you. Asset rich - cash poor. Can I ask when you became a Limited Company is the a large charge to sell the property to the company. The figure for this is possibly in there, maybe in the fees or taxes. But this was where my IFA and accountant are saying its not worth me doing " due to the charges for selling the properties to a Ltd company". Sorry if its a stupid, obvious question.

Susan Bradley

15:51 PM, 9th June 2023, About 4 months ago

Reply to the comment left by rbinscotland at 09/06/2023 - 10:48
This is why it really is important to have a bespoke consultation with Property118 because they will be able to take all of your personal aspects into account. My husband and I did just that and have no regrets at all - we are saving a fortune in tax. We went from both of us being higher rate tax payers to barely paying any income tax. So we are just fine but what is even better is that our (grown up) children will be so much better off. The advice was not cheap but it was worth it for us.


17:11 PM, 9th June 2023, About 4 months ago

This year is also bad for us, asset rich and 'very' cash poor, no thanks to S24 and high interest rates.
We have already started this process with P118. We spoke to our accountant and two other companies. P118 had the best solution for us.
Met the team at the recent property show and they offered the same advice that I was thinking about; perhaps look to reduce the mortgages on less issue / high yield properties by selling a few. This is one of many options, to grow, reduce or stay as we are.
Another country option after incorporating and wanting to retire is interesting, I don't know too much about how that works but will ask P118 at the time in the future.
The hardest part is gathering all the data, but it's an exercise we either do now or later if we are selling 1 by 1 on our personal names.
Property was a secondary income and now it's primary, it's possible to grow a stock portfolio too; company shares, personally held shares, ISAs, pension pots. This is worth looking at in case you sell and have surplus money.
Well done to Nicky Kita at Property 118 and being patient.
The service we went for; Incorporation & IHT.


9:28 AM, 13th June 2023, About 4 months ago

Reply to the comment left by Susan Bradley at 09/06/2023 - 15:51
Thanks Susan. It always seems that my IFA says the selling to the LTD and stamp duty will outway pretty much any chance of adjusting. I know he pretty much knows more about my property tha i do as he has been my FA for over 20 years. Must surely be no way around a simple sale to the Ltd co as they are the rules. I will enquire further. But I still have multi mortgages and I wished the portfolio could be under one Mortgage / Loan to a co to keep me away from the Taxman. I dont pay myself a salary although i use my personal allowance at the HMRC reporting stage. Baically theres nothing left once income / expenses are worked out monthly.

Deepak Rajput

9:48 AM, 13th June 2023, About 4 months ago

Reply to the comment left by rbinscotland at 13/06/2023 - 09:28
Hi. Most IFAs don't understand the concept of transferring the 'beneficial interest' of one's property portfolio to a limited company and thus why stamp study is not paid.

Susan Bradley

10:53 AM, 13th June 2023, About 4 months ago

Reply to the comment left by rbinscotland at 13/06/2023 - 09:28
If you have 4 or more properties you might not have to pay Capital Gains tax or stamp duty because there are quite legitimate was to restructure your business assets. If you own them with someone else you might have a de facto partnership. If you don't have a partnership it might be wise to set one up. Honestly don't guess! If they can't help you you will get your consultation fee back so you have nothing to lose and might gain a great deal. Accountants and IFAs are not the same as tax planners and unless you have a reason to explore you tend to lump them all together. It is a bit like medical people in that they are all doctors until you need one and then you find out what sort of specialist is best for the problem you are facing.


12:16 PM, 13th June 2023, About 4 months ago

Something about costs do not add up.
It is already a given that they were a partnership - de facto, and therefore presumably de jure.
They avoided the costs of an LLP agreement and waiting 3 years.
Apart from the project management fee of £6000, they paid a further £13,000 for the substantial incorporation structure.
How did they manage to avoid £8000 plus VAT for the Smart Company Family Investment Company?


10:43 AM, 15th June 2023, About 3 months ago

What is a “business Partnership by de-facto.” ?

I think the properties were held in own names, is it something to do with the number of properties and property investment trading history ?

It sounds very risky,


10:53 AM, 15th June 2023, About 3 months ago

Reply to the comment left by Bwel at 15/06/2023 - 10:43
Thank you.
My question is for Property118 and Cotswold Barristers:
How did their client avoid a fee that is How did they manage to avoid £8000 plus VAT for the Smart Company Family Investment Company?

Susan Bradley

16:13 PM, 15th June 2023, About 3 months ago

Reply to the comment left by SCP at 15/06/2023 - 10:53
They might have decided not to set up a Smart company (yet). Everyone is given the options that the team decide suits their personal circumstances. For instance these people had debts so they would not have been given the information that my husband and I were given because we were not only mortgage free but had considerable equity. I don't know how often it needs to be repeated that the advice is bespoke rather than generic. We are extremely happy with what Property118 did for us - we had several meetings and our accountant was in attendance at all of them. Plus they have very many testimonials from satisfied customers.

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