Capital Account Restructure – Case Study

The following is an example of a strategy which might be applicable to landlords (private housing providers) who are considering the sale of their ‘whole business’ to a Limited Company in exchange for shares and using ‘incorporation relief’ under TCGA92/S162. The legislation allows rental property business owners to roll capital gains into shares in the company the properties are being transferred into. This is becoming an increasingly popular topic of conversations between landlords and their professional advisers, due to the restrictions on finance cost relief to the basic rate of tax for individual landlords.

You will appreciate that there is never likely to be a ‘one-size-fits-all’ solution structure for landlords to operate within. However, this example serves to provide you with some insight into the level of creativity we might be able to share with you.

HMRC business income manual BIM45700 provides examples of how business owners can borrow money to withdraw up to the value of their capital account from their business. However, refinancing pre-incorporation and again upon incorporation can be cost prohibitive.

One solution to this problem might be to arrange bridging finance pre-incorporation.

The maximum level of funding would be limited to the owners capital in the business, not the net equity in the business which may well be a significantly higher number. Equity in the business then matches the capital gain to be crystallised on completion of the business sale.

On incorporation, the bridging finance debt could then be ‘novated‘ to the company (subject of course to the full consent of the lender) and documented in the business sale agreement.

Property118 Limited may be able to assist by introducing you to bridging finance providers to facilitate such transactions, subject of course to underwriting and T&C’s. There are, of course, many other ways to finance the withdrawal of capital from a business including remortgaging, overdrafts credit cards etc.

There are two opportunities which then arise at the point of the business sale.

First opportunity

Post incorporation, the funds released to the business owners could then be loaned by them to their Limited Company in the form of Directors/Shareholders Loans.  The company could then choose to use that injection of cash to repay the bridging finance novated to it upon incorporation, which in turn could be be used to repay the bridging finance. The outcome is that the owners of the company would then have a Directors Loan Account, which can be repaid from company net profits or net proceeds of fixed asset sales. This can be preferable to the business owners than rolling their own capital into share premium.

Second opportunity

The owners of the business might wish to use the capital they have extracted from the business pre-incorporation for personal reasons, e.g. to repay personal debt, to buy a larger house, to improve personal liquidity, to make gifts Potential Exempt Transfers for IHT planning purposes or buy luxury items such as a holiday home.

In such circumstances, short term finance can be repaid from increased mortgage finance following the business sale to the company.

Further structures exist to defer the cost of refinancing at the point of incorporation, until such time as it is commercially viable, please see this link if your properties are based in England or Wales. If your properties are in Scotland please see this link.

Our services

We charge £400 for an initial landlord tax planning consultation process which includes:-

• Fact Find and satisfying HMRC’s ‘Know Your Customer’ requirements for anti-money-laundering compliance requirements
• Written report and recommendations including links to relevant HMRC manuals, legislation and case law where appropriate. This is prepared in conjunction with Cotswold Barristers who also comment of the legality of the suggestions and provide a quotation for any legal work associated with implementation of any recommended restructuring of the business. If instructed, Cotswold Barristers also adopt the recommendations made by Property118 Limited as their own professional advice.
• Video conference between the client, Cotswold Barristers, Property118 Limited and the introducing Accountant to serve as a Q&A session. Recording functionality is built into the software we use to enable all participants to retain a soft copy of the conference call.

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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