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There will never be an optimal ‘one-size-fits-all’ business structure for tax purposes. At the foot of this page there are several links to articles and videos explaining some of the options you might like to discuss with us.

Effective landlord tax planning utilises all available tax breaks legislation provides for. Nobody in their right mind wants to pay more tax than they are supposed to pay, but not everybody knows how to go about optimising their tax position or even the existence of many forms of tax relief or ownership structures available to them.

With the correct planning it may well be possible for you to utilise tax legislation to optimally restructure your property rental business, without any requirements to refinance or to pay capital gains tax or stamp duty. We are not referring to loopholes or tax dodges, but perfectly legal structures that your Financial Adviser or Accountant might never consider bringing to your attention.  This is because restructuring a business involves ‘reserved legal activities’ such as drafting Shareholders Agreements, redrafting Memorandums and Articles of Association, drafting Declarations of Trust, conveying properties and preparing Sale and Purchase Agreements. Only qualified, experienced, regulated and insured lawyers such as Cotswold Barristers can advise on and perform these activities.

Prior to introducing the Section 24 legislation “restricting finance cost relief for private landlords to the basic rate of tax” in his Summer 2015 Budget, the Chancellor at that time (George Osborne) commissioned the OBR (Office of Budget Responsibility) to produce an impact report. That report suggested that 19% of all private sector residential landlords would be affected by the legislation and pay more tax. Therefore, we can deduce that circa 400,000 UK landlords have mortgages are higher rate tax-payers.

The Property118 Tax team, in association with Cotswold Barristers, are specialists in advising on incorporation relief, but not all landlords qualify for reliefs to make a viable case to proceed down this path. Therefore, we also recommend a variety of other ownership structures.

All recommendations are bespoke, we do not believe in a ‘one-size-fits-all’ approach.

Our specialist landlord tax consultants provide guidance on the pros and cons of sole ownership, joint ownership, Partnerships, LLP’s, Limited Companies and Plc.’s as well as transitional relief available to switch between these various ownership structures. Our tax and legal team also provide guidance on non-resident status and benefits as well as property related business continuity, legacy and inheritance tax planning.

Our barristers each carry £10,000,000 of Professional Indemnity insurance and prepare each case as if it will be investigated by HMRC.

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New Landlord Tax Planning Case Study

The following is a ‘Readers Question’ that was posted on the Property118 discussion forum in September 2021. Feedback on our response has included phrases like “Outstanding!”, “Solid Advice” and “I wish I had known about your services years ago”.

We need some Buy to Let Tax Advice on our Let to Buy Plans Please

My wife and I are looking to buy a larger more expensive home and let the one we currently live in.

Barclays have offered us some great interest rates because we have a large deposit for the new property and a lot of equity in the existing one, which they will give us a Buy to Let mortgage on.

We have a perfect credit score and plenty of income to cover the loans and being Barclays Premier Banking clients I think that’s why they are offering us such a good deal.

I have two initial questions in regards to tax and will look into booking a tax consultation with Property118 if you can help me with these two questions,

I do have a few ideas of my own, but I will not share them at this stage because I am curious to see what Property118 and it’s Members suggest first.

My first question is in regards to SDLT.

Is there are way around paying the additional 3% rate on the new home we are planning to buy?

My second question is in regards to the Section 24 restrictions on finance cost relief. We think we understand this means that we will not be able to offset the mortgage interest on our Buy to Let mortgage against rental income, but instead we will receive a 20% tax credit. If I am right, this means that we will effectively paying a 25% rate of tax, because we are 45% tax payers, on our mortgage interest on the Buy to Let.  So, what’s the best way to structure this please?

Thanks in advance for your help.

Regards

Neil

Response from the Property118 Tax Team

Hi Neil

Our initial suggestion is that you sell your existing home (the one that will become a Buy to Let) to a newly formed Limited Company. There will not be any Capital Gains Tax to pay because this property has (presumably) been your home from the day you first purchased it. Your company will pay SDLT plus the 3% additional rate on this transaction, however, you will then save the 3% additional Stamp Duty on your new home.  We will be happy to help you to do the number crunching to see whether the SDLT saving on your new home would more than cover the SDLT that would need to be paid by the company, but you should not make your decision based on that calculation alone.

There are other advantages of having your BTL property in a company. The first is that Section 24 does not apply to companies. This means you will be able to offset 100% of your mortgage interest against the rental income.

If the interest rate that Barclays are offering on your new home mortgage is similar to the BTL mortgage they are offering, it might make sense to borrow more against the rental property and less against your new home. This is because you won’t get any tax relief on the mortgage interest on your home.

If the interest rate on the Buy to Let mortgage is higher than the interest rate on your new home mortgage then a bit of number crunching will be required to calculate the best outcome when also factoring in tax.

Another advantage of selling your existing home to a Limited Company is that the element of the sale and purchase consideration which isn’t subject to a mortgage can be regarded as a Directors/Shareholders loan. One of the additional benefits of structuring the deal that way is that you will then be in a position to retain your rental profits in your company at a much lower corporation tax rate than the 45% rate of tax you would pay if the property was owned in your own names. Furthermore, the company can use that retained profit to repay your Directors/Shareholders loans to you and the repayment of that money would be tax free for you.

Last but not certainly not least is inheritance tax, which may well be important for you if you and your wife plan to leave a legacy for your loved ones.

By structuring your Buy to Let transaction as per our suggestions above, the value of your shares in the company will be negligible at the beginning. However, as your Buy to Let property appreciates in value, so will the value of your shares in the company. If you do nothing about this, your loved ones may well be subjected to 40% inheritance tax on that capital appreciation when they eventually inherit those shares. For example, if we assume that your Buy to Let property is worth say £300,000 on day one, it might quadruple in value by the time you die. That’s £900,000 of growth which could be subjected to a whopping £360,000 of inheritance tax! However, there is a way you can solve that problem for your beneficiaries by doing the right things now.

With professional legal advice, it is possible to amend the Memorandum and Articles of Association of the Company to dictate which classes of shares accumulate any such growth. Naturally, this would also require your company to have multiple share classes too. If you give those “growth shares” away whilst they are worth very little, then any growth can accrue outside of your estate for inheritance tax purposes.

The growth shares could be gifted to one or any number of people, but for the purpose of flexibility we suggest you gift them to a Discretionary Trust. That way, you set the rules and you can also amend them during your lifetime. For example, you may change your mind over who you want to benefit from the trust over your lifetime.

As you may have gathered, the inheritance tax planning we have described above is extremely complex. You will probably need a professionally drafted Shareholders Agreement too. This sort of planning should never be DIY and Financial Advisers and Accountants can’t help either, because the work required involves “reserved legal activities”. There is also a huge amount of anti-avoidance legislation you could fall foul of, such as GAAR, DOTAS and the settlement Legislation, which is why insured professional advice from a fully trained, practicing, regulated, experienced and insured Barrister-At-Law is so vital.

As an indication of the legal costs to implement all of the above, you would need to budget around £20,000 – of which circa 75% would be for the inheritance tax planning. You will never see the benefit of that of course, but it will eventually save your loved one’s a fortune. That’s why we used the words ‘the right thing to do’. The other thing to bear in mind is that if you get a taste for being a landlord, the structure we have recommended above is sufficiently flexible to accommodate any number of additional rental properties you acquire. You only need one structure like this, regardless of how many properties you own.

The above is just an initial overview based on the information you have shared with us. It must not be regarded as professional advice at this stage, but we hope you have found it helpful.

For anybody reading this who already owns a rental property business, it’s never too late to start your planning. We have helped several very established landlords to restructure their rental property businesses in this way. Whilst the inheritance tax structure we have described will not solve the problem for assets you have already accumulated, we can stop the clock so that any future growth accrues outside your estate.

High Net Worth Established Landlord Tax Planning Case Study

This case study is based on a Merchant Banker resident in Central London. For the benefit of his retirement and legacy planning he has been building a UK rental property business for several years, mainly within City.

Due to having no mortgages at all he was completely unaffected by the Section 24 restrictions on finance cost relief. Nevertheless, incorporation was massively beneficial to him in regards to income tax planning, CGT planning and IHT planning.

Let’s begin with a simple overview of his circumstances when he first approached us.

  • Rental property business value £12million
  • Acquisition costs of the properties £4million
  • Capital Gains £8million
  • Tax rate 45%

The incorporation structure we recommended enabled him to transfer the entire £8million of capital gains in his properties into shares in the company he incorporated into, meaning no Capital Gains Tax fell due – see TCGA92/S162. This enabled his company to sell several of the London properties and to reinvest elsewhere without having to pay the 28% CGT which would have fallen due previously.

Prior to his incorporation we arranged a £4million overdraft to enable him to withdraw his personal capital investment from the business. The Business Sale and Purchase Agreement indemnified this debt and the bank novated the facility to the new Company.

Post incorporation he then made a shareholders loan personally to the company for £4million using the funding raised prior to the incorporation, thus taking the company overdraft back to £0.

NOTE the company now owes him the £4million, which he can withdraw from the company completely tax free when the money exists to do so, e.g. from future retained profits or net proceeds of property sales. The company could also take a mortgage against the properties and use the proceeds of that to repay some or all of the shareholders loan if necessary.

This is what we had achieved for him at that stage.

  • Capital gains of £8 million removed from properties and into the company shares
  • 45% income tax reduced to 19% corporation tax
  • The ability to withdraw £4,000,000 from the company with no personal taxation consequences
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