How Angie and Dan Could Have Saved £280,000

How Angie and Dan Could Have Saved £280,000

12:50 PM, 6th May 2017, About 5 years ago 32

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Angie and Dan are very successful landlords by most peoples’ standards. By 2015 they had amassed a property empire worth £10,000,000 with only £4,400,000 of mortgages. That’s just 44% LTV. 

For several years, Dan and Angie had been drawing just £90,000 between them and using the rest of their profits (after paying tax at 45%) to pay down their mortgages.

However, being 45% additional rate tax payers, the thought of paying an extra 25% tax on their mortgage interest by 2020 made them angry, so they set about a strategy to reduce their borrowing even faster.

They had already identified their most expensive mortgages and were paying those down first. However, the tax changes inspired them to sell the properties their most expensive mortgages were secured against instead. This amounted to £3,000,000 in property values and £2,000,000 of mortgage debt. The base cost of the properties was £2,000,000 hence there was a capital gain of £1,000,000 which was taxed at 28%, i.e £280,000 when the sales completed.

The outcome was that Angie and Dan had reduced their mortgages to £2,400,000 on a portfolio worth £7,000,000. Their LTV had reduced to 34.3% and they had £720,000 cash to reduce their mortgages further to £1,680,000, giving them an LTV of just 24%. They had planned to repeat this until they had no mortgages at all.

However, they have now learned that none of this was necessary. They needn’t have paid £280,000 of CGT and they certainly didn’t need to pay 45% tax on the money they had been using to pay down their mortgages.

By incorporating their business they could have ‘washed out’ all of those gains by rolling them over into shares in their own company and claiming section 162 incorporation relief. Furthermore, they would only pay 19% corporation tax and another 7.5% tax on their dividend incomes between £11,500 and £45,000 each. Their net effective tax rate on their incomes would have been just under 25% on this basis, and reducing over the next two years due to the phased reduction in corporation tax rates.

But it gets even more interesting for the following reasons.

REASON ONE – Previously, where Angie and Dan had been paying 45% tax on profits used to pay down debt, they could have been paying just 19% corporation tax. That’s £26,000 less tax on every £100,000 of rental profit used to reduce debt

REASON TWO – the additional 25% tax they would have been paying on mortgage interest by 2020 does not apply to incorporated landlords

REASON THREE –  if they had sold the exact same properties the day after incorporation, none of the £280,000 of CGT would have been payable. Therefore, they could have used the full £1,000,000 of net sale proceeds to pay down their debts.

Ah …. but…. I hear you cry; what about the CGT and Stamp Duty they would have incurred at the point of incorporation?

Well ……… because Angie and Dan had always traded together with a view to making a profit, and due to the time and effort they could show they commit to their “business”, they would have been entitled to claim incorporation relief to negate these taxes.

There are obviously rules to consider but these are all explained in a presentation you can download for just £20.

Don’t you think Dan and Angie might be feeling a little hard done by now?

Do you think they might now decide to pay for proper advice on the basis that it has already cost them £280,000 + not to?

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by Tobias Nightingale

19:36 PM, 6th May 2017, About 5 years ago

I wish those enterprizing souls well, although when you say they are 'very' succesful having a portfolio including debt of £10 mil. I say indeed they are, makes me wonder how some in my neck of the woods have managed to breach at least £100 mil mark though. Makes me wonder if 1 reason why the gov did crack down on interest relief is because some were using property to launder masses of money? Who knows could be wrong but I just cannot grasp going from zero to that, where as with the couple in this story I can somewhat grasp.

by Mick Roberts

6:55 AM, 7th May 2017, About 5 years ago

Very VERY good words Mark.
Simple explanation, where some of us struggle to understand the concepts/figures etc. when being explained to by someone else.

'would only pay 19% corporation tax and another 7.5% tax on their dividend incomes between £11,500 and £45,000. Their net effective tax rate would have been just under 25% on this basis,' I've been looking for simple explanation on that for 2 years. So it's not Brucie Bonus only paying 7.5% tax, it's after we've already paid the corporation tax.

And why no Capital Gains any more when in company? Is this this silent rule I'm hearing about that they start again from the new house value once in the company?

by Mark Alexander

7:45 AM, 7th May 2017, About 5 years ago

Reply to the comment left by "Mick Roberts" at "07/05/2017 - 06:55":

I've not heard it called the silent rule Mick but your understanding is correct

by Dr Rosalind Beck

13:17 PM, 8th May 2017, About 5 years ago

Reply to the comment left by "Mark Alexander" at "07/05/2017 - 07:45":

Hi Mark. Isn’t it better to then wait as long as you can before incorporating so that even more CGT is 'washed out' if prices are still rising?

by Mark Alexander

13:21 PM, 8th May 2017, About 5 years ago

Reply to the comment left by "Dr Rosalind Beck" at "08/05/2017 - 13:17":

Maybe, but what if the legislation is changed?

Also, what about section 24 meanwhile?

Even prior to s24, many landlords like Angie and Dave would have been substantially better off by incorporating.

by Trendo

17:08 PM, 8th May 2017, About 5 years ago

The setup cost of re financing along with the probable higher interest rate of commercial loans has not been addressed in the above scenario. I suspect that Angie & Dan will have older BTL mortgages, if the portfolio is mature, paying less than 2% which will increased to more like 3 or 4% on new commercial loans.

by Mark Alexander

17:26 PM, 8th May 2017, About 5 years ago

Reply to the comment left by "Trendo " at "08/05/2017 - 17:08":

Hi Trendo

With the correct structure, there is seldom a requirement to refinance.

When you download the presentation, the structure to negate the requirement for refinancing is also revealed. Thank you for pointing out that omission in my blog but I can assure you that it is covered in the presentation.

by Max Wright

11:00 AM, 13th May 2017, About 5 years ago

Can I have some more details about what you get for £20 please? Also, you mention PC users, does this work on a Mac as well?

by Mark Alexander

13:45 PM, 13th May 2017, About 5 years ago

Reply to the comment left by "Max Wright" at "13/05/2017 - 11:00":

The PDF will open on Mac, the PowerPoint presentation may not if you don't have the Microsoft Office Suite installed

by Sean Graveney

14:45 PM, 13th May 2017, About 5 years ago

If you don't have Office then you should be able to download Open Office to your Mac (for free) and that will open Powerpoints... or just get the PDF.

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