Landlords Union Reveals How Its Members Net Profits Can Sky-Rocket By Switching Ownership Structure

by Mark Alexander

2 months ago

Landlords Union Reveals How Its Members Net Profits Can Sky-Rocket By Switching Ownership Structure

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Landlords Union Reveals How Its Members Net Profits Can Sky-Rocket By Switching Ownership Structure

Far too many landlords have been guilty of focusing on problems than solutions when it comes to optimising their rental profits.

In many cases, changing the ownership structure can prove to be far more effective than refinancing or increasing rent.

EXAMPLE

Mr Patel enjoys a £50,000 salary from his ‘day-job’. He also owns two properties which bring in £2,000 a month of rent. His mortgages cost one third of this and other expenses amount to another third. Over the year this leaves him with £8,000 of profit. However, in the current tax year he will be taxed on £10,000 of profit, £12,000 the year after, £14,000 the year after that and eventually £16,000 a year from the 2020/21 tax year onwards, such are the effects of the Government restrictions of claiming finance cost relief. He pays 40% tax on the first £8,000 and the equivalent of a further 20% of the additional fictional profit.

However, Mr Patel’s wife doesn’t work. Moving the properties into the name of his wife results in no tax being paid at all. They don’t even need to refinance because this can be achieved using Declarations of Trust. There is no CGT on transfers between spouses and as a result of minor changes to SDLT legislation in the Autumn Budget 2017 there is now no SDLT either.

The tax savings are as follows:-

2017/18   £3,600

2018/19  £4,000

2019/20  £4,400

2020/21  £4,800

The cost of the advice is £400 and in this case implementation cost a further £600, so £1,000 in total. I trust you will agree that’s a ‘no-brainer’?

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Comments

Seething Landlord

2 months ago

"There is no CGT on transfers between spouses and as a result of minor changes to SDLT legislation in the Autumn Budget 2017 there is now no SDLT either, regardless of whether properties are mortgaged."
I can't find any other reference to such a change, which could make a real difference to many of us considering the pros and cons of this approach. Where is it documented?

Mark Alexander

2 months ago

Reply to the comment left by Seething Landlord at 14/03/2018 - 15:20
I’m on my travels this week so don’t have access to my full systems.

However, I do know this has also been confirmed by PWC and there is an article on their website. I will ask Neil Patterson to post a link to that.

We also have further correspondence with the author at PWC but that cannot be posted as it was in “professional confidence”

Mark Alexander

2 months ago

Reply to the comment left by Neil Patterson at 14/03/2018 - 16:03
Oops!

Thanks Neil.

I knew it was one of the big six.

Mark Alexander

2 months ago

Reply to the comment left by Mark Alexander at 14/03/2018 - 16:04
Extract from the website Neil linked to above. Highlighting added by me ....

Seething Landlord

2 months ago

I think the article is referring to the additional 3% charge and that there will still be SDLT payable at the normal rate on transfers of mortgage liability between spouses. The following is an extract from the draft clause implementing the budget changes to HRAD (higher rate for additional dwellings)
"Exception where spouses and civil partners purchasing from one another
4
After paragraph 9 insert—
“Spouses and civil partners purchasing from one another
9A (1) A chargeable transaction is not a higher rates transaction for the
purposes of paragraph 1 if—
(a) there is only one purchaser,
(b) there is only one vendor, and
(c) on the effective date of the transaction the two of them
are—
(i) married to, or civil partners of, each other, and
(ii) living together (see paragraph 9(3))."
and the explanatory notes
"New paragraph
9A
means that HRAD will not apply to
exchanges of interests between
spouses or civil partners"
.

Mark Alexander

2 months ago

Reply to the comment left by Seething Landlord at 15/03/2018 - 13:08
I think you could be right, which is why we are desperate for HMRC to update their manuals.

Even on that basis though, there will be a major tax planning advantage on the basis that a proportion of beneficial interest can be gifted such that the deemed consideration in regards to mortgage liability of up to £125,000 can be without SDLT being incurred.

Seething Landlord

2 months ago

Reply to the comment left by Mark Alexander at 15/03/2018 - 13:15
Mark, while on the subject of SDLT, have you any insight as to whether transfers of mortgage liability on different properties between spouses are regarded as linked transactions and therefore assessed for SDLT on the cumulative amount rather than separately?

Mark Alexander

2 months ago

Reply to the comment left by Seething Landlord at 16/03/2018 - 11:29
I will ask Counsel and report back. His office deal with SDLT returns.

In most cases, where SDLT would applicable, we are dealing with a partnership formation/registration at the same time anyway. In accordance with FA2003/sch15 there is no SDLT payable on a transfer into a partnership.


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