10:27 AM, 16th August 2018, About 3 years ago
A few months ago the Property118 team were called upon to assist an accountancy practice to consult on the strategic restructuring of a new client (an established landlord business partnership with 67 properties) which the accountants had recently been engaged to act for.
Insight is a thriving, multi-faceted, financial services business. They started as an IFA firm but subsequently bolted on the accountancy practice, a Private Clients division to provide a finance brokerage services, an estate planning business, an estate agency and a property development arm.
The outcomes we collectively achieved for their new landlord client by combing our knowledge, experience, contacts and strategies was quite remarkable.
Some of the details in the case study below have been slightly tweaked, so as not to embarrass the clients by potentially revealing their identity to other landlords who they know read Property118, but the general principles of the planning and associated outcomes are absolutely genuine.
The monthly mortgage interest payments of the business were reduced by £2,150 a month, after refinancing some of the properties to raise money to pay the fees for the financial planning and associated costs of implementation, which amounted to £60,000. This was achieved by securing significantly lower interest rates, fixed for the next 5 years.
The clients business washed £2,700,000 of capital gains out of its properties and into the shares of the company into which it was incorporated. The company will now only pay corporation tax on any capital appreciation from this point on, and only if/when it sells any of its properties.
No CGT or Stamp duty was payable at the point of incorporation.
£1.6 million of tax free cash was released using bridging finance, secured only against solicitors undertakings, prior to incorporating. The business simply increased its total indebtedness to withdraw all capital from the partnership capital account. These funds were subsequently loaned back to to company, post incorporation, in the form of Directors Loans. The company then used that cash to repay the bridging finance which had been novated at the point of incorporation. The outcome is the Directors are now able withdraw the next £1,600,000 of retained profits or net proceeds of property sales out of the business without incurring any personal tax. The company will simply repay the money the Directors Loans to achieve this.
The owners of the business used just a proportion of their monthly cash flow savings to solve their IHT problems with an insurance based solution.
The net effective tax rate of the owners of the business was reduced significantly, in part due to negating the effects of the restrictions on finance cost relief, but also due to the fact that retained profits used to pay down mortgage debt are now taxed at the 19% corporation tax rate as opposed to the 45% additional rate of personal tax they had been paying for several years.
Not surprisingly, the Directors of the business are now looking to expand by adding further assets to their property portfolio and are in regular contact with the development and property sourcing arm of Insight.
Property118 Limited is now retained by Insight to assist with holistic and strategic financial and tax planning for their clients as and when required.
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