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12:50 PM, 6th May 2017, About 7 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?
Show Book a Tax Planning Consultation
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gfs properties
14:13 PM, 12th March 2018, About 6 years ago
hi guys , just looking for some info on the cost of incorporation, one page (BICT) the cost for 52 properties is £11995 however on the page for SISS in Scotland the cost is £29340, just wondering what the difference in price, can you use the BICT method if you live in Scotland..
Mark Alexander - Founder of Property118
14:21 PM, 12th March 2018, About 6 years ago
Reply to the comment left by gfs properties at 12/03/2018 - 14:13
BICT does not work in Scotland because beneficial interest does not exist in Scottish Law.
SISS is similar but conveyancing is required on every property, hence the extra cost.
SISS also works in England and Wales but unsurprisingly nobody has chosen that option.
gfs properties
14:27 PM, 12th March 2018, About 6 years ago
Reply to the comment left by Mark Alexander at 12/03/2018 - 14:21
hi Mark,
so in other word that the only way to do it at a cost of £29k it make mr question if its worth the trouble..
Mark Alexander - Founder of Property118
14:41 PM, 12th March 2018, About 6 years ago
Reply to the comment left by gfs properties at 12/03/2018 - 14:27
That’s one of the reasons we offer the consultations. It’s a big decision so it’s very important to look into the viability in great details.
The first SISS case was for a partnership with 73 properties so the cost was even higher. However, those costs pailed into insignificance in comparison to the tax savings and other benefits. This was because of the high ratio of mortgage costs to income.
You could, of course, refinance completely but that is likely to cost even more.
gfs properties
14:58 PM, 12th March 2018, About 6 years ago
hi again,,
the more I read the more confused I'm getting.
under beneficial deeds of transfer due diligence is £125 per property so for 52 properties £6500 then £7495 to go ahead with everything so a total of £13995 , but this is less that the £29k quoted on an another page , so what is the right cost.
also if I have 20 properties with the one mortgage company would you still need to look at all 20 mortgage statements would they not just all be the same so actually cutting down on the due diligence fee
gfs properties
15:00 PM, 12th March 2018, About 6 years ago
ok so how do I go about booking a consultation, and who is it with..
regards,
Marco.
Mark Alexander - Founder of Property118
15:10 PM, 12th March 2018, About 6 years ago
Reply to the comment left by gfs properties at 12/03/2018 - 14:58
Beneficial Deed if Transfer is a product we were hoping to launch and believed we were ready to do so. However, it fell apart in the final stages of due diligence. I thought that page had been deleted so thanks for the ‘heads up’ I will make sure it is removed now.
Mark Alexander - Founder of Property118
15:15 PM, 12th March 2018, About 6 years ago
Reply to the comment left by gfs properties at 12/03/2018 - 15:00
Details of consultations are via the SISS page.
https://www.property118.com/tax/substantial-incorporation-strategy-scotland/
The pricing of SISS is correct.
gfs properties
13:23 PM, 14th March 2018, About 6 years ago
HI Mark,
ok i ran the scottish version past my accountaint and he wasnt 100% sure that it was a good idea, maybe he not quilified in this type of scenario or maybe a bit to cautious because of the fees inviolived but his concern was this,---
We have seen in the last few years, especially with the EBT’s with Rangers F.C. etc. where despite Legal opinion and Accountancy opinion saying they would work they have come back to haunt various Companies!
has this been tried with any Scottish based landlords and has it been accepted 100%
what's your thoughts..
regards,
Marco..
Mark Alexander - Founder of Property118
14:32 PM, 14th March 2018, About 6 years ago
Reply to the comment left by gfs properties at 14/03/2018 - 13:23
Hi Marco
I am very familiar with the Glasgow Rangers disguised remuneration scheme which resulted in the club being fined by both HMRC and the FA as well as being demoted in the Scottish football league for cheating. I have every sympathy for Rangers fans, whose anger was quite rightly directed at the management of the club.
This structure is nothing like that whatsoever.
The HMRC legislation which allows incorporation relief has been in existance since 1992 has has been successfully utilised by thousands f landlords throughout the UK. It is the right of any business business owner(s) to decide whether they operate their businesses as sole traders, partnerships or Limited companies and certain reliefs exists to enable them to transition between one structure and another.
SISS exists to enable landlords to transition to a Limited Company status whilst avoiding the need to refinance tax. The structure does not avoid tax, but there may be tax benefits associated with incorporation. I am shocked that your accountant cannot understand the above and if you would like me to refer you to a competent, regulated, experienced and fully insured Scottish accountant who does understand the SISS structure I will be happy to do so once we have completed the initial due diligence and a consultation which determines whether SISS is the appropriate strategy for you.