17:05 PM, 16th March 2020, About 2 years ago 18
When my husband and I first started investing into rental property in the mid 1990’s we invested £250,000 of our own savings into the business, which has been a Partnership from day one. We subsequently borrowed a further £250,000 to inject into the business, making a total of £500,000 of personal investment.
In the early days we borrowed a further £500,000 in the form of buy-to-let mortgages. We have always been quite risk averse and invested for cashflow. Against what appears to be the ‘herd mentality’, we have since repaid those mortgages too. The result of which is that we have invested £1,000,000 of our taxed income into the establishment of our property rental business, which is now unencumbered, save for the £250,000 we borrowed against our home.
With the benefit of the wonderful capital appreciation enjoyed in the South West, our property portfolio is now worth in excess of £3,000,000.
We are contemplating incorporation for a number of commercial reasons. Section 24 isn’t one of them, because we have no BTL mortgages. However, we do like the additional layer of protection that Limited Liability status provides and we are also considering business continuity and legacy planning. Furthermore, we are contemplating selling a few of the lesser performing properties and reinvesting into commercial units and holiday lettings for ‘staycations’
It was always our intention to repay the £250,000 we borrowed against our own home. We could, in theory at least, refinance a few of our BTL properties and release cash to repay that. However, to date we have not done so because personal mortgage rates on are so low. Nevertheless, we understand that doing so would be regarded as withdrawing our own capital from the business and would have no tax consequences.
EDITORS NOTE – correct, see HMRC manual BIM 45700 – LINK
However, we are not convinced that it makes sense to swap very cheap debt for slightly more expensive BTL mortgage debt.
The other potential problem we might face is that my husband and I are now in our late 70’s, so BTL mortgage financing may not be a viable option anyway?
Furthermore, we understand the process of incorporation would automatically result in ‘incorporation relief’ being applied. In our case we would ordinarily exchange £2,750,000 of equity in our business for shares in our own company. No CGT would fall due at the time because it would be rolled over into the shares. This would essentially ‘wash out’ the capital gains from the properties, thus making the sale and transition in commercial and holiday lettings far more viable too.
EDITORS NOTE – correct, see HMRC manual CG65700c – LINK
However, we feel we could be ‘shooting ourselves in the foot’, because it would be nowhere near as easy to sell £750,000 of shares in a private company as it would be to raise £750,000 of BTL mortgages to facilitate the withdrawal of our capital now.
It might be possible for us to raise the full £1,000,000 on BTL mortgages now and withdraw the cash from the partnership before we incorporate. The problem with that is that it would leave us with £1,000,000 of mortgage debt to service and early repayment charges if we were to lend the cash back to the company in the form of a Directors/Shareholders loan to repay it.
For the reasons stated above, we are extremely interested in the bridging finance you are able to raise, based on your page which describes Capital Account Restructuring. Presumably, we could borrow and repay such a facility either side of the proposed incorporation far more economically than by remortgaging?
EDITORS FURTHER NOTES
We have checked our responses with our Hon. Legal Counsel, Mark Smith, Head of Chambers at Cotswold Barristers. Our responses to your questions above are as follows:-
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