Major Breakthrough in Landlord Tax Planning

by Mark Alexander

17:19 PM, 17th April 2017
About 2 years ago

Major Breakthrough in Landlord Tax Planning

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Major Breakthrough in Landlord Tax Planning

Mark Smith Head of Chambers at Cotswold Barristers

He’s only gone and done it again!

This time it’s in regards to partnership SDLT/LBTT relief on incorporation.

Mark Smith is no stranger to challenging conventional interpretation of laws effecting landlords, but the news I got this weekend may well be regarded in the fullness of time as his biggest breakthrough to date.

Accountants and tax lawyers have widely held the opinion that to qualify for incorporation relief, which exempts landlords from paying Stamp Duty (LBTT in Scotland) on the incorporation of a property investment partnership, the business must be recognised by HMRC by having a partnership Unique Tax Reference number “UTR” and having filed partnership tax returns. However, Mark Smith staked his professional reputation and his PI insurance on on this being irrelevant.  The opinion he has long since held is that a partnership is defined by the Partnerships Act 1890 and that eligibility for the relief follows the same arguments in what constitutes a “business” as in the HMRC vs Ramsay case.

Yet again, Mark Smith has been proven to be right.

Today I learned that a handful of Property118 readers have successfully obtained advance voluntary clearance from HMRC for incorporation relief under both s162 TCGA and for partnership stamp duty relief despite the apparent odds being against them.

In one example that Mark Smith explained to me a husband and wife jointly own a portfolio of rental property and spend in excess of 20 hours managing their business. They have never filed partnership returns, nor do they have a partnership UTR. They don’t even have a business trading name!

Nevertheless, they had always operated a joint business bank account and with professional guidance were able to document why they believed themselves to be operating both a business and a property investment partnership based on Mark Smith’s interpretation of the law. This was the basis of their clearance request to HMRC, which also included details of their their intention to transfer 100% of beneficial ownership in exchange for shares in the new company, but not legal ownership at the point of incorporation.

I am delighted to report that HMRC clearance was granted on all points.

I must point out that it was the clients tax advisers that sought and obtained the HMRC clearance and not Mark Smith, as this is not his remit. Perhaps it should be though?

A few of the properties were owned by the couple individually but rental profits had been declared on self-assessment returns as 50/50. Again this defies conventionally accepted accounting logic but was nevertheless accepted by HMRC as proof of the existence of the partnership.

In view of the above we have amended the Portfolio Restructure Software used in our tax planning consultations. At the same time we have also updated the tax bands and allowances in accordance with announcements the Chancellor of the Exchequer’s Spring 2017 Budget.

Other notable achievements for landlords by Mark Smith

In June 2017 Mark Smith’s opinion that mortgage lenders could not call in a long term mortgage unless the borrower was in default was also upheld by the Court of Appeal (see Mark Alexander vs West Bromwich Mortgage Company). This case came off the back of the UK’s largest ever direct access representative action case. The mortgage lender had added a premium to some of its lifetime Bank of England base rate tracker rate mortgage margins. Two of the largest landlord associations refused to back my case in any way and instead referred their members to the Financial Ombudsman Service “FOS” to make complaints. Insurers also refused to back the case and both the FOS and the High Court sided with the mortgage lender before the case was eventually awarded to the Property118 Action Group by the Court of Appeal. With the help of Cotswold Barristers we managed to raise sufficient money to fund an adverse costs award if we had lost the case. However, this wasn’t necessary because the entire £27,500,000 of illegally overcharged tracker mortgage interest was ordered by the Court of Appeal to be refunded. Furthermore, the entire costs of the case were recovered from the other side and the Court also awarded compensation interest. The crowd-funding monies raised were, therefore, returned in full.

In 2015 Mark Smith created a legal product which enabled landlords to incorporate without having to refinance. Industry perception was generally skeptical about this too, however, Mark Smith has since proven his critics to be wrong.

A very special relationship

When Property118 formed The Landlords Union last year it was inevitable that Mark Smith would become our Honorary Legal Counsel. We now speak on a daily basis and consult each other on all tax strategies we recommend. Cotswold Barristers insist upon Property118 Portfolio restructure Software being completed before they will accept tax planning related instructions. This software is provided to all consultancy clients of Property118.

Incorporation Relief – Do You Qualify?

Landlord Tax Planning – Free Information

Tax Advice Negligence – Can I Sue My Accountant?



Comments

Tobias Nightingale

19:19 PM, 17th April 2017
About 2 years ago

Sadly for those who just have a small number of properties it does not seem there is a way out and incorporate as it would be mighty difficult to say you were work on managing the properties 20 hours per week. Unless I am missing something. But glad of course for those who don't have as many as the even bigger portfolio LL can stil incorporate due to the 20 hour rule.

Mark Alexander

19:44 PM, 17th April 2017
About 2 years ago

Reply to the comment left by "Tobias Nightingale" at "17/04/2017 - 19:19":

Hi Tobias

Only you know how much time to spend managing your own rental property business. Time is rather subjective too because some people are far more efficient than others.

As owners of a property rental business we remain accountable for over 180 pieces of legislation, regardless of the fact that we may outsource some of the work. The ongoing running of our business is no less than that of directors of a company in terms of ongoing due diligence and continued professional development, all of which takes up a significant amount of our time. We have listed below some of the regulations and procedures that we remain accountable for as follows:-

• Considering rent offers made by tenants, regardless of whether or not tenants are sourced through agents
• Tenant selection decisions based on referencing, whether or not tenants are referenced through agents
• Considering the purchase of Rent Guarantee Insurance, and checking to ensure that agents have organised it where instructed to do so
• Organising re-quoting and/or renewal of buildings, contents and landlords liability insurance
• Checking that tenants deposits are registered and that prescribed information has been correctly served by our agents if an agent is involved
• Checking that prescribed information in respect of tenancy deposits is re-issued by agents when fixed term tenancies end and roll over to statutory periodic tenancies
• Checking that annual Gas Safety checks have been organised and that certificates have been issued in a compliant and timely manner
• Checking that rents are paid as due by agents and that accountants are notified accordingly
• Liaising with agents and legal advisers over rent arrears and any other breaches of tenancy
• Liaising with insurers over claims
• Paying ground rents and service charges in a timely manner
• Considering accounts and minutes prepared by freehold management companies and liaising accordingly
• Liaising with agents over maintenance issues reported by tenants
• Sourcing/paying for items needing to be replaced
• Checking that EPC certificates are up to date
• Keeping up to date with selective licensing arrangements being introduced by various Councils
• Reviewing check in/out inventories produced by agents
• Dealing with deposit refunds
• Dealing with ADR in respect of tenancy deposit disputes
• Reviewing market rents
• Continued professional development through reading news, forums, industry websites and attending expo’s and landlord meetings
• Liaising with accountants in respect of tax returns and other accounting matters
• Daily bank reconciliation
• Regular reviews of the mortgage market for optimal lending terms

The above is certainly not an exhaustive list, it is merely the tip of the iceberg.

I sometimes wonder how HMRC decide how to challenge landlords over the matter of time spent. I can't imagine them spending 24 hours with a landlord holding a stopwatch and a clipboard to monitor this. Even if they did, at the end of that day what's to stop the landlord saying "well that was a quiet day, how many days will you be with me for?"

As we all know, sometimes a whole week or even month can be completely uneventful, but other times can be manic. Being a landlord is far from a 9 to 5 job, as all the landlords reading this comment on an Easter Bank Holiday Monday evening will testify to.
.

Simon Hall

21:51 PM, 17th April 2017
About 2 years ago

Mark, this is great News! Especially clearance from HMRC!

Does this strategy also gets us around for not having to remortgage into LTD Company Mortgage Products? I am assuming BICT Strategy which you discussed previously is different from above?

Mark Alexander

22:21 PM, 17th April 2017
About 2 years ago

Reply to the comment left by "Simon Hall" at "17/04/2017 - 21:51":

This isn't a new strategy, it's just incorporation. BICT is therefore applicable to avoid the need to refinance.
.

Jane Hicks

13:03 PM, 18th April 2017
About 2 years ago

Just checking that this will not throw up a problem with CHL (Capital Home Loans) as I read somewhere that they had clauses in their T & C which might cause problems

Mark Alexander

13:30 PM, 18th April 2017
About 2 years ago

Reply to the comment left by "Jane Hicks" at "18/04/2017 - 13:03":

CHL do indeed have a clause in their mortgage T&C's precluding beneficial transfers. They are the only lender we know of with such conditions.

Choices are:-

1) Do nothing, stay as you are and accept the consequences of that decision
2) Refinance all CHL loans
3) Take a commercial decision to intentionally breach CHL terms on the basis that beneficial transfers are invisible to lenders and no case law exists to show a mortgage lender has ever repossessed on the basis of such a default.This is,nevertheless a risk which isn't insurable. If you were to proceed on this basis you would have to do so in the knowledge that a lender could call in your loan if ever the default was discovered. Worst case scenario is that you might only get 30 days to repay CHL by refinancing or with cash. Quite how CHL would find out though I have no idea given that beneficial transfers are not recorded anywhere, unless of course you where to inform CHL yourself.
.

Jane Hicks

13:36 PM, 18th April 2017
About 2 years ago

Thanks Mark.

I am still considering exit strategies ......

Mark Alexander

14:02 PM, 18th April 2017
About 2 years ago

Reply to the comment left by "Jane Hicks" at "18/04/2017 - 13:36":

Phased exit is my preferred choice as I'm afraid to throw the baby out with the bath water.

With talk of capital values and rent increasing by 18 - 25% over the next five years I would kick myself if I sold the lot now. Also, I wouldn't know where best to invest the money.

One nice thing about incorporation, which is rarely discussed, is that incorporation relief washes capital gains

EXAMPLE

Portfolio purchased for £1 million is now worth £2 million.

Gain is £1 million.

Equity is exchanged for shares and the new share value offsets the gain. That's ow s162 incorporation relief works.

Providing that equity is greater than the gain there is no CGT to pay on incorporation and using the example below, the base cost of the properties owned by the company is now £2 million. Hey presto, you have a new base cost! If you were to sell the lot the day after there would be no capital gain, hence no tax to pay.
.

Paul Singh

8:59 AM, 19th April 2017
About 2 years ago

Mark, What is the process and cost structure for setting up a BICT?

Mark Alexander

9:38 AM, 19th April 2017
About 2 years ago

Reply to the comment left by "Paul Singh" at "19/04/2017 - 08:59":

Hi Paul

BICT is the end of the process, it enables the transfers of beneficial interest to the company without having to refinance. Look at BICT as the conveyancing process.

The cost is between £7,000 and £14,000 depending on the size of your portfolio. Contact Cotswold Barristers for more details.
.

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