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

gfs properties

20:39 PM, 14th March 2018
About A year ago

hi mark,
thanks for your reply, I am very keen to do this and I am going to book the consultation, ( is this with yourself ) and I appreciate the offer to put me on too another accountant, but if possible I would like to stick with them as they have been our accountants for ages now and we have a couple of other businesses and they look after them all. is it possible for you to deal direct with them on any queries, or is everything done through me..
thanks
Marco

Mark Alexander

10:06 AM, 15th March 2018
About A year ago

Hi Marco

You need to book the consultation and supply the initial information for compliance purposes. For example, we have to do background "know your customer" checks for HMRC money laundering compliance regulations. We also need to complete a Fact Find. My PA will contact you as soon as you make your booking to deal with that.

Once I receive the necessary information, which you can ask your accountant you with if necessary, I will personally prepare the initial report and recommendation for you to consider and to discuss with your accountant. I will be happy to have a three-way telephone Q&A session with you and your accountant if required.

If your accountant then feels able to take on the necessary accounting work he can continue to act for you. If not, then I can arrange to introduce you to our recommended accountants, who will be pleased to work alongside your own.

The final stages will be for me to refer you to Scottish solicitors to prepare a business sale agreement, an agency agreement between you and your company, to exchange missives, to have the transfer documents signed but not registered and then finally to submit LBTT returns within 30 days.

I look forward to hearing from you.

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