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13:08 PM, 14th July 2015, About 9 years ago 21
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As most portfolio landlords have realised, if the Summer Budget tax reforms go ahead, they will arguably be the most devastating blow ever dealt to landlords, especially those with a high gearing strategy who own properties as individuals.
There may well be opportunities to restructure into a company without transferring assets or triggering CGT and SDLT.
Just suppose I set up a new limited company and my broker puts in an application to a commercial lender for a big loan, equal to my BTL mortgage.
The four most important questions the proposal must address are:-
1) What is the security?
2) How will the loan be serviced?
3) What is the money to be used for?
4) What is the track record of the borrower?
In my case, the answers would be:-
1) I am prepared to offer a personal guarantee secured by first charge over my BTL properties which are worth £………
2) I will grant a 25 year lease on my properties to the new company at a rent sufficient to match interest cover requirements, and of course to wipe out my tax completely. Note that the chancellors tax only applies to finance costs, not rent 😉
3) I want the money to repay my existing BTL mortgages as the tax regime is no longer effective for me. I can’t transfer the properties to the company without incurring CGT, which is sadly not available for rollover relief
4) My pedigree as a landlords is ……….
I would continue personally to be responsible for the letting and the income, maintenance, insurance etc, as the landlord, but as opposed to paying interest, I would be paying rent to the head lessee (NewCo). I would be liable to pay tax on any profit I make personally, but guess what, I doubt there will be any! 😉
All I need to do now is to persuade a few commercial lenders to consider this structure (and perhaps a few of the more commercial BTL mortgage lenders) and to negotiate decent terms. I suspect they are as worried about the Budget announcements as most portfolio landlords are (default possibilities), so I suspect they might be a lot easier for me to convince than some people might imagine, especially due to my commercial finance broking background and all of my contacts in the NACFB, both member brokers and lander patrons.
This structure is likely to be most attractive to landlords with high levels of borrowing (e.g. over £1 million)
Have I cracked the problem for established portfolio landlords like me, those of us who will be worst affected by this budget?
I will be sharing the results of my investigations with my Consultancy clients, including ………
1) details of all lenders who are willing to consider this structure, and
2) copies of the documentation I use to put such an arrangement into place
The cost of becoming one of my Consultancy clients is £1,995. Usually, this is for 6 months of telephone and email support (and one face to face meeting of up to 4 hours) but I will be sharing my research will all of my Consultancy clients regardless of when my research is completed, i.e. I will still share it even if it’s completed a year from now.
I will not be sharing my research and documentation openly on the forum, the reason being that I need to commercialise what I am doing in order to fund the costs of my research, and all necessary professional advice from specialist tax accountants and lawyers.
My Consultancy fees will not cover any costs of implementation of the strategies I share, or any bespoke professional legal or tax advice that you require.
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Neil Patterson
13:18 PM, 14th July 2015, About 9 years ago
I can see this working immediately for portfolios of 70% LTV or less which is standard maximum gearing for commercial loans.
However who knows what a portfolios gearing will be in two years time or over the phase in period (less hopefully) or lenders appetite to even consider an increased LTV.
Great out of the box thinking Mark.
Mark Alexander - Founder of Property118
13:27 PM, 14th July 2015, About 9 years ago
Reply to the comment left by "Neil Patterson" at "14/07/2015 - 13:18":
Thanks for pointing that out Neil.
I would also like to draw attention to the case law in respect of restructuring to avoid tax ....
“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax” (IRC v Duke of Westminster [ 1936 ] AC1 (HL))
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Mark Alexander - Founder of Property118
14:45 PM, 14th July 2015, About 9 years ago
It has just occurred to me, this structure has even more advantages than I first thought.
Not only can rental profits be manipulated for maximum tax efficiency but as a result of retaining ownership in the name(s) of individual(s) the IHT allowances and annual CGT allowances are also retained.
Now I'm kicking myself for not having invented this years ago!
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Mark Alexander - Founder of Property118
14:50 PM, 14th July 2015, About 9 years ago
It has just occurred to me, my latest restructure concept has even more advantages than I first thought.
Not only can rental profits be manipulated for maximum tax efficiency, but as a result of retaining ownership in the name(s) of individual(s) the IHT allowances and annual CGT allowances are also retained.
Now I’m kicking myself for not having invented this years ago!
Basis of alternative structure linked below
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Ewan Murray
15:30 PM, 14th July 2015, About 9 years ago
Not sure about answer 2 Mark. (Not saying your wrong either though.)
Someone with specialist knowledge of leases and in particular IAS17 needs to look at that.
It may be what you are portraying is a finance lease and therefore has an embedded finance cost.
Mark Alexander - Founder of Property118
15:49 PM, 14th July 2015, About 9 years ago
Reply to the comment left by "Ewan Murray" at "14/07/2015 - 15:30":
Hi Ewan
What makes you think it might be perceived as a finance lease?
Such structures are highly prevalent in commercial property investment. I bet there's one in your town centre. Here's an example ....
Most shopping malls are owned by pension funds these days, let's call the pension funds the "owner".
The owner grants a Fully Repairing and Insuring lease to a mall operator, let's call the mall operator the "landlord"
The "landlord" collect rents from the retailers occupying the shops, pays for the insurance and maintenance etc, pay the rent to the "owner" and pockets any profits or shells out for losses.
The "owner" doesn't have to worry about collecting all the rents or managing the mall, the "landlord" does all that. All the "owner" is interested in is the covenant of the "landlord".
Does that help?
Interestingly, the "owners" of these malls trade them for around 25 times the rent paid by the "landlord". Pension funds are not the only buyers these days, the Chinese and the middle eastern billionaires are also snapping them up.
One of my best friends is a leisure park and marina owner operator. In recent years he has been utilising this business model to package his freeholds in this way and effectively securitise his business, which is now completely debt free.
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Ewan Murray
16:13 PM, 14th July 2015, About 9 years ago
I'd just have some concern that concern that the substance of the relationship between you and the NewCo, although in the legal form of a lease, may be regarded by hmrc differently.
As i said it a specialist area i'd want to square off via insurance backed advice as part of my due diligence.
Mark Alexander - Founder of Property118
16:27 PM, 14th July 2015, About 9 years ago
Reply to the comment left by "Ewan Murray" at "14/07/2015 - 16:13":
That's exactly what I'm planning to do. Effectively I will be crowd funding the initial cost of the advice and allowing my supporters to have full details of it. Their own insured advice should then be far cheaper as it will already be pretty much templated. They may even choose to use the same advisers as I do.
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19:24 PM, 14th July 2015, About 9 years ago
Do you mean that you the owner of the props take the loan ...or the ltd co takes the loan. ..... if that money is used to pay off your personal mortgages then surely it will be treated as personal income of some sort and taxed accorcingly?
If rent is paid to you by ltd company then that is back on personal tax outside ltd co?
not clear of the fundamentals you are setting out here mark ?
Mark Alexander - Founder of Property118
0:04 AM, 15th July 2015, About 9 years ago
Reply to the comment left by "Simon Dewsberry" at "14/07/2015 - 19:24":
The company takes the loan.
The complex part is, as you say, utilising the company money to repay personal debt without triggering tax liabilities.
My professional advisers are considering a variety of options. It seems there will be tax to pay but in the scheme of things it will still be an efficient option for a lot of people. I will share the full details of the arrangement with my Consultancy clients, i.e. the people who assist me to effectively "crowd fund" the cost of the professional advice.
Worst case scenario will either be that people pay £1,995 to have it confirmed that a scheme isn't possible, or that worse still, they pay nothing and there is a scheme will could save them a fortune which they are oblivious to.
It is never a good idea to over publicise tax wins, otherwise any loopholes are quickly closed.
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