Last opportunity to make a correct decision ….

by Readers Question

8:36 AM, 13th November 2016
About 2 years ago

Last opportunity to make a correct decision ….

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Last opportunity to make a correct decision ….

Hi Mark.

As a Property118 Founder Member I took advantage of a free 15 minute consultation with Mr Mark Smith of Cotswold Barristers (The chap who extracted 27.5 million GBPs from the West Bromwich Building Society) Last opportunity to make a correct decision

I began by asking him, in view of my circumstances , whether it was worth me incorporating my Buy to Let portfolio and to give me me an idea of costs should it be worthwhile. Mark confirmed that my own strategy was sound and benefits of incorporation in my case are marginal. There the matter rests and I am confident that I am taking action based on the finest advice available.:-) ( A pretty good feeling actually…)

Moving on, My daughter and my niece (both higher rate tax payers) are determined to buy a Buy to Let Property in London. My daughter is a Doctor and has a limited company for the purposes of receiving payments for locum work. The company is likely to be extant for the foreseeable future. I asked Mark Smith in passing whether the company used for the locum work could be used legitimately to purchase my daughters half of the house. The answer was a resounding yes, provided the company articles are modified to include property rental as part of the business.

I took heart from this and advised my daughter to ask her accountant if he could change the company articles as necessary and to tell her how much it will cost. The accountants response was to offer a personal report for £650+VAT.

The pertinent facts are that my daughter and her cousin are taking a 5 year view of this investment and will be keen to sell after 5 years (I think that’s short termism, but they know best). Purchase price is £440k. Deposit 20%, mortgage interest 2% As I see it the tax changes will be ramping up from next April for 4 years and will be at there most draconian at that point precisely at the time when they will be looking to sell and get out of the B2L market for good and buy a residential place each. So perhaps incorporation benefits are marginal in this case especially as one CGT allowance will be lost if my daughter buys through the company and her cousin buys as an individual.

I am taking an interest as it seems a shame not to take advantage of the limited company as its overheads are already being met from other income so it is essentially free as far as the purchase is concerned.

I think my question is “is it really worth paying the £650+VAT for a report or is my gut feeling that the benefits of incorporation are only marginal given the 5 year time frame likely to be correct.

Any views and comments welcome.

Thanks

Chris



Comments

Mark Alexander

9:01 AM, 13th November 2016
About 2 years ago

Hi Chris

It would take a fair bit of number crunching of both facts and assumptions to establish what is the most effective property owning structure. You have already considered the loss of annual personal CGT allowances vs mortgage interest being treated as a legitimate business expense for a company. There will also be other considerations.

I charge just £400 including VAT for Consultancy to complete a "fact find" and to produce a report on the most efficient holding structures - please see >>> https://www.property118.com/tax/

Mark Smith is absolutely correct from a legal perspective (as one would expect) but other factors need to be taken into consideration as well.

If a company is appropriate for your daughter then I would suggest forming a holding company which owns her shares in medical practice and a new property trading company which would effectively then be a sister company. Note that mortgage lenders do not like lending to companies which provide services, they only like lending to property companies. Also, a common mistake of making a property business a subsidiary of a services provision company is this would mean that if for any reason the services business failed it could also affect the property business.

I am unable to comment on your own property holding structure as you haven't said what it is or provided any of the key figures. However, what I can say is that Incorporation tends to be marginally attractive for borrowers when taxable income from all sources, plus annual mortgage interest, exceeds a £43,000 share per owner. The greater the taxable income share per owner, the more cost effective incorporation becomes. BICT avoids the costs of refinancing, it has zero effect on tax. Therefore, to calculate the effectiveness of BICT, you first need to establish whether incorporation is an effective strategy. If it is, then you need to consider the costs BICT vs refinancing.

If one owner has more that £43,000 of taxable income and mortgage interest but others do not then it may be possible to restructure this first. This should be considered prior to considering incorporation as it is a far cheaper process. There are plenty examples of this on the Tax page I have linked you to above.
.

H B

9:28 AM, 13th November 2016
About 2 years ago

Hi Chris,

I see you daughter has obtained a mortgage at 80% LTV on a property in London despite being a higher rate tax payer. That is obviously really good going considering all the changes going on in the market at the moment - do you know which lender is offering this deal still?

Stephen Jones

22:20 PM, 14th November 2016
About 2 years ago

2% on 80LTV?? I'm also interested to hear who the lender is..


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