I decided to go Ltd Company route?

by Readers Question

13:49 PM, 27th February 2020
About 5 months ago

I decided to go Ltd Company route?

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I decided to go Ltd Company route?

I have been a part time BTL landlord for many years managing my portfolio of 10 plus residential properties myself, all of which are mortgaged . With the advent of the zero tax relief policy I decided to go Ltd Company route.

I placed 7 of my properties into the limit company leaving 3 in my own name.

I have since given “b” shares to my 6 adult children, but retain control by having “A” shares.

I was always advised, and read that HMRC do not recognise personal BTL investments as a “Business” the prospect of this in relation to the new tax system was daunting to say the least hence my decision to go Ltd.

I have today been advised by my accountant that, because I did not move the “whole” personal portfolio over at the same time I may not be entitled to corporation relief and could incur a huge Capital Gains tax burden !!……I paid the stamp duty of £60.000 at the time.

I am, to say the least, astounded because no one ever advised me of this and my understanding was and still is that HMRC do not accept personal portfolios as a “Business” how can the inland revenue change its mind as it appears, in “retrospect” and now almost 2 yrs later designate my previous activities as a Private BTL landlord as a Business?

Richard

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Comments

Neil Patterson

13:52 PM, 27th February 2020
About 5 months ago

Question answered by Mark Alexander:

"Dear Richard

HMRC and your accountant are absolutely right. Incorporation relief only applies if you transfer the ‘whole business’.

HMRC’s ‘meaning of business’ test for the purposes of claiming incorporation relief can be found at >>> https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65715

I am very sorry to tell you that there is no solution to your CGT problem now. Without wishing to rub salt into your wounds, Property118 could have provided the guidance you needed to make a far better informed decision for a fee of just £400.

All the best
Regards
Mark Alexander"

Rob Crawford

16:32 PM, 27th February 2020
About 5 months ago

Ouch!

Mark Alexander

21:59 PM, 27th February 2020
About 5 months ago

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.

Relief under TCGA92/S162 is sometimes referred to as ‘incorporation relief’.

Source: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65700

This case should serve as a lesson to others in regards to the value of professional advice as opposed to taking a “DIY” approach to tax planning!

Binks

9:20 AM, 28th February 2020
About 5 months ago

Reply to the comment left by Mark Alexander at 27/02/2020 - 21:59
A follow question please Mark as the OP states he has 10 properties. Even if they were all transferred at the same time, HMRC would hardly classify such a small number of properties as business anyway, would they? My understanding was that it would need to pass the “sufficiently full time” occupation condition. So presumably incorporating was not the right thing to do in the first place?

Mark Alexander

9:33 AM, 28th February 2020
About 5 months ago

Reply to the comment left by Binks at 28/02/2020 - 09:20
It's difficult to say without knowing the full facts.

In the HMRC vs Ramsay test case, Mrs Ramsay only owned one property, which was sub-divided into 10 units. She won her case to prove that she was a business at the Upper Tier Tax Tribunal, this creating Case Law.

You can read more detail via the link to HMRC's internal manuals for Tax Inspectors below.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65715

AA

21:03 PM, 28th February 2020
About 5 months ago

Reply to the comment left by Mark Alexander at 28/02/2020 - 09:33
The case and point was the Ramsay's were doing more than just the "passive" renting activities as defined by HMRC. They were cleaning common area, maintaining the grounds etc. If you are not doing tasks above and beyond the HMRC 's consideration you can have your position contested if you cant prove it. As much as I admire Mark, and I do, with respect to his landmark win, this solution to incorporate is not straight forward as it is being sold as.

Mark Alexander

21:30 PM, 28th February 2020
About 5 months ago

Reply to the comment left by AA at 28/02/2020 - 21:03
We have never suggested that incorporation is straightforward. In fact, we only recommend incorporation as the optimal restructure to around one in 10 clients. For the others, there are better alternatives, for example, please see https://www.property118.com/tax/llp-structure-reduces-landlords-tax-bill-case-study/

Mark Alexander

21:41 PM, 28th February 2020
About 5 months ago

Reply to the comment left by AA at 28/02/2020 - 21:03
I would also add that even HMRC's own internal manuals for the tax inspectors can be confusing. For example, an extract from their internal manual PIM1020 states as follows:-

Introduction: what is a UK property business?
Rental business: what is it?
Profits from UK land or property are treated, for tax purposes, as arising from a business.

From the 2017-18 tax year, the cash basis (see PIM1090 onwards) will be the default way of reporting the profits or losses of a property business for IT customers. However, profits or losses of a tax year must be calculated in accordance with GAAP if certain criteria are met - most notably if the landlord is a company or other another CT customer. Before this change however, the vast majority of landlords had to use GAAP (see PIM1100 onwards).

The broad scheme is that rental business profits are computed using the same principles as for trades but the taxpayer is not actually treated as if they are trading. Thus, for example, CGT reliefs for traders are not available.

For simplicity the rental activity is called a ‘rental business’ in this manual. But the rental business can include other types of income as well as rents.

More information about rents and other receipts is given at PIM1050 onwards.

More information about the expenditure that can be deducted from receipts to arrive at taxable rental business profit is given at PIM1900 onwards.

Terms used in legislation
In ITTOIA05/S264 and CTA09/S205, a rental business is referred to as a UK property business.

Alternatively, if applicable, ITTOIA05/265 and CTA09/206 refer to an overseas property business.

Who carries on a rental business?
Any person or body of persons carries on a rental business if:

they own or have an interest in land or property in the UK; and

they enter into transactions that produce rents or other receipts liable to IT or CT from that land or property.

The list of those who carry on a rental business includes individuals, partners, trustees, personal representatives, trustees in bankruptcy, and non-resident companies subject to IT on their income from property. For more about trusts see PIM1045.

A person will carry on a rental business even if they engage an agent to handle it for them. The person carries on the business through the agent.

All rental business activities treated as one
In most cases all the various types of income from land and property in the UK are treated as parts of the same, single rental business. It does not matter how many properties the taxpayer has, or how many different types of income from land and property. This means that normally all the rental business receipts and expenditure can be lumped together and, hence, that the expenses on one property can be deducted from the receipts of another.

However, if a landlord has income from property in the UK and income from property outside the UK, the landlord is treated as having two business: a UK property business and an overseas property business.

SOURCE >>> https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1020

Their 'meaning of business' test in their Capital Gains Tax Manual doesn't actually say what most people think it says. See the final sentence from the 'meaning of business' page of that manual below ...

You should accept that incorporation relief will be available where an individual spends 20 hours or more a week personally undertaking the sort of activities that are indicative of a business. Other cases should be considered carefully.

SOURCE >>> https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65700c

LordOf TheManor

21:58 PM, 28th February 2020
About 5 months ago

Thanks everyone for the input into this situation. Got it - methinks - so far.

What is there to know about incorporating in the manner given if you're NOT in a 'partnership'? Anything on offer for sole trader investors???

If there is, nothing is clear - so far.

If there's nothing, I could do with a large prayer mat PDQ. (Any denomination will do).

Thanks.

Lord

Mark Alexander

22:04 PM, 28th February 2020
About 5 months ago

Reply to the comment left by LordOf TheManor at 28/02/2020 - 21:58
If your prayers aren’t answered you might wish to consider booking a consultation with one of the Property118 tax team.

Many of our clients are sole owners and in most cases we are able to help. If we cannot offer a realistic solution to your tax problems we will refund your consultation fees without quibble.

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