Short Term Tax Planning LoanMake Text Bigger
We are delighted to announce that we have formed an exclusive relationship with a private financier for the benefit of Property118 tax planning clients.
The following case study provides an example of how the structure works. It should be read in conjunction with our Landlord Tax Tutorials – LINK.
A partnership has a property rental business which is planning to incorporate.
The key figures are:-
- Value: £5,000,000
- Base cost for CGT purposes: £3,000,000
- Capital Gain: £2,000,000
- Existing mortgage Debt: £2,000,000
- Equity available to covert to shares: £3,000,000
CGT on the capital gain would ordinarily be 28% of £1,000,000. However, this can be offset by the creation of shares and claiming incorporation relief under section 162 TGGA.
If the partnership debt is increased to the base cost (even short term) we can still mitigate all CGT whilst creating a Directors Loan Account on the new company balance sheet. A short term tax planning loan is required. The structure of the financing to achieve this is as follows:-
Our private financier provides a short-term lending facility for the difference between equity and base cost. In the example above this would be £1,000,000.
The facility is granted to the business partnership on a very short term basis. The loan becomes immediately repayable on incorporation or within 7 days, whichever is sooner.
The outcome following incorporation is that NewCo would have a £1,000,000 liability to the former partners. This could then be repaid to the former partners from future company profits without the partners incurring further income tax.
The tax savings resulting from the short term tax planning loan could be as much as 38.1% of the value of the directors loan account created, which is equal to the additional rate tax payable on dividends. In this example that equates to £381,000. Even if only the basic rate dividend tax of 7% is saved this still produces a considerable saving net of the costs of setting up the loan.
The cost of this short term private financing is 2% of the loan amount, i.e. £20,000 in this example.
The minimum loan is £500,000 and there is no maximum.
These facilities are available exclusively to Consultancy clients of Property118 Limited.