How Angie and Dan Could Have Saved £280,000

by Mark Alexander

12:50 PM, 6th May 2017
About 2 years ago

How Angie and Dan Could Have Saved £280,000

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How Angie and Dan Could Have Saved £280,000

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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Comments

Max Wright

15:56 PM, 13th May 2017
About 2 years ago

Thanks for the advice guys. Can anyone please give me any further information about the Property118 Landlord Tax Presentation?

Does it contain anything that I wouldn't have already learnt by general reading on the subject?

I know it is only £20, but I hate wasting money.

Mark Alexander

16:00 PM, 13th May 2017
About 2 years ago

Reply to the comment left by "Max Wright" at "13/05/2017 - 15:56":

Please tell us everything you already know and then I will be able to answer your question
.

Max Wright

17:26 PM, 13th May 2017
About 2 years ago

Mark that is a very sarcastic answer I am only trying to understand what is on offer.
Like many others, I have wasted money on stuff only to find out that what I buy is just a vehicle to sell me more very expensive stuff.
Bear in mind I was one of the people who had pledged for you to publish your book!
I am not a numpty!

Mark Alexander

18:09 PM, 13th May 2017
About 2 years ago

Reply to the comment left by "Max Wright" at "13/05/2017 - 17:26":

With the greatest of respect Max, it was a pretty stupid question which is why I gave it the answer I felt it deserved.

It's £20 my friend, if you would prefer a private consultation that costs £400 but comes with a total satisfaction or money back guarantee.
.

Max Wright

18:20 PM, 13th May 2017
About 2 years ago

Mark, I do not think most of your readers would think it a stupid question, I am sure they too have wasted money on property information that is nothing more than trying to sell something.

No doubt it is the £400 consultation that will be recommended in the £20 intro document.

I will try it but hope I am wrong that it is just a selling tool.

Mark Alexander

18:27 PM, 13th May 2017
About 2 years ago

Reply to the comment left by "Max Wright" at "13/05/2017 - 18:20":

Max, please explain how else I could possibly have answered your question without knowing what you already know? Your question was ...

"Does it contain anything that I wouldn’t have already learnt by general reading on the subject?"
.

matchmade

15:41 PM, 5th February 2018
About 2 years ago

Reply to the comment left by Mark Alexander at 07/05/2017 - 07:45
Sorry, I've come to this thread late. I may be misunderstanding but Mark and Mick, you appear to be saying that when property is transferred into a limited company, any CGT owing if the properties were sold to a third party is nullified/"washed out"/negated, which implies reduced to zero. Surely this can't be right? My understanding of TCGA92/S162 is that the CGT is merely "rolled over", i.e. as Inland Revenue Manual CG65700 says, "the charge to CGT on the whole or part of the [property's] gains will be postponed until such time as the person transferring the business disposes of the shares".

In other words, the slate hasn't been wiped clean by incorporation: the CGT is still a liability on the company's accounts, but payment of the tax has been deferred and is now triggered by pro-rata sale of the company's shares, rather than the sale of the property itself once it's inside the company.

Mark Alexander

15:50 PM, 5th February 2018
About 2 years ago

Reply to the comment left by Tony Atkins at 05/02/2018 - 15:41
Hi Tony

Your reading of the legislation is correct. However, there is no need to sell the shares just because you sell the properties is there?

Let’s say your portfolio cost £1m to build but is now worth £5m. You sell the business to NewCo for £5m and roll the £4m of gain into shares (assuming you have at least that much equity in the portfolio of course!).

Let’s say the day after the above the company sells its properties to a third party for £5 m. The gain made of £zero, hence it has been “washed out” of the properties and into the shares. There is no CGT to pay because there has been no gain. You only pay CGT if you dispose of the shares.

The bigger question is how you get the £4m out of the company without being clobbered with tax. I share that information with my consultation clients.

matchmade

17:02 PM, 5th February 2018
About 2 years ago

Thanks Mark for clarifying that. No, of course there's no need to sell the shares at the same time as any property, though they will have to be sold sometime, given away or inherited and the deferred CGT dealt with then.

I assume that continued capital gains in the property's value after incorporation are reflected by growth in the value of the shares as they are tied to the value of the company's overall set of assets.

Mark Alexander

17:31 PM, 5th February 2018
About 2 years ago

Reply to the comment left by Tony Atkins at 05/02/2018 - 17:02
Hi Tony

CGT ceases to be payable in death. A capital gain can only be crystallised when a person is alive. Death is not a strategy we recommend for tax avoidance though LOL.

If the money has all been withdrawn from the company prior to death there is no IHT to worry about in the shares either because they would have no value for probate purposes.

Future growth in property values would indeed add value to shares. However, for IHT purposes we recommend a strategy using “Freezer Shares” AKA “Growth Shares”. This is a well trodden path is estate planning which you should easily be able to find out more about via a Google search. Naturally, we offer structures of this nature, where appropriate, to our paying tax planning consultation clients. Formal advice is signed off by Cotswold Barristers, whom we also recommend to deal with the legal work in relation to implementing the strategies we recommend.

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