What Does “Washing Out CGT On Incorporation” Actually Mean?
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The way we prefer to explain “Washing Out CGT On Incorporation” is by using an analogy in the first instance and then relating it back to the question.
Imagine you have just cleaned a muddy floor with a white towel. The towel isn’t white any more is it? This is because the mud has been transferred from the floor onto the towel. The floor might well be clear of mud but the towel isn’t is it? The mud still exists, it has merely been transferred.
Now imagine washing the towel in a bucket of water. You can wash the mud out of the towel but the mud remains in the water doesn’t it?
In both scenarios there is no less mud after the transition than there was before. You have simply moved the unwanted mud from an inconvenient position to a more convenient position for you.
In this analogy, the mud represents the capital gains on which CGT is ordinarily payable. The towel represents shares in your new company and the bucket of water might represent your long term exit strategy.
When a property rental business is transferred into a company it is treated as a sale, which crystallises capital gains. For example, if you acquired a property for £100,000 which is now worth £500,000 the capital gain is £400,000. However, a piece of legislation called TCGA92/S162 enables business owners to exchange equity in their business for shares and to offset the value of the shares created (the value of the equity in the business) against the capital gain resulting from the sale of the business, to reduce or even eliminate the payment of CGT at this point by deferring it. Effectively, the capital gains have been transferred from the properties into the shares in the company, much like the mud being transferred from the floor to the towel, or the towel into the bucket of water.
Imagine a scenario where a property was originally purchased for £100,000 but transferred to a company for £500,000. If that property was sold for £500,000 the following day, the company would have made no profit, hence there would be no capital gains. This is because the £400,000 of capital gain has been washed out of the property and into the company shares. Therefore, the CGT is deferred until the shares (not the properties) are disposed of.
However, there are two scenario’s at least where CGT would not fall due on disposal of the company shares. These are:-
If the owner of the shares dies before they are transferred – rather an extreme way to avoid paying tax though!
The second second is if the shares in the company are sold to a REIT. This is the equivalent to my analogy of washing the towel in the bucket of water.
Given that property investment strategies change, it may well be that you own properties which you would not buy again at todays prices. Likewise, you may well be able to reinvest the money you have got tied up in those properties into better performing property based assets. However, you may well be hanging onto those properties because they are heavily pregnant with capital gains. If you are in this position, then incorporation of your rental property business might be the solution you are looking for.
Key Points To Consider BEFORE You Incorporate
How much better off will you be? To help you to calculate this we have developed software you can download for just £97 – details via THIS LINK
Will CGT be payable? Given that you will be selling your properties to the Limited Company, you will be crystallising your capital gains. Ordinarily, this would mean that Capital Gains Tax is due. However, in certain circumstances, ‘incorporation relief’ will enable you to roll some or all of the capital gains into shares in your Limited Company which you exchange for equity in your properties. The rules are explained HERE. The software mentioned above also calculates the CGT position for you.
Will the company need to pay Stamp Duty when the properties are transferred into it? Given that the company is essentially buying the properties from you, Stamp Duty would ordinarily apply. However, in certain circumstances, relief is available. The rules are explained HERE. The software mentioned above also calculates the Stamp Duty position for you.
Will you need to refinance? The costs of refinancing can be extremely high. Furthermore, if you are tied into mortgage deals with early repayment charges or you have particularly competitive financing terms already, it may not be economically viable for you to apply for new mortgages in the Limited Company name. However, there are legal structures available which enable you to defer new financing until it is financially viable for you, or to the end of the existing mortgage term. Details HERE.
For just £400 we can complete a full Fact Find and analysis of your position and then prepare a bespoke report and recommendations outlining the optimal adaptation plan for you.
This can then be checked by your existing professional advisers and our Hon. Legal Counsel, Mark Smith, Head of Chambers at Cotswold barristers who will adopt our recommendations as his own professional advice subject to you agreeing to instruct him to deal with the legal work necessary for implementation. Even after all of that, if you’re anything less than 100% satisfied you can claim a full refund of our £400 consultation fee under our GUARANTEE of total satisfaction.
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Definitions and Interpretation
In this Policy the following terms shall have the following meanings:
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Information About Us
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Our Data Protection Officer is Neil Patterson, and can be contacted by email at email@example.com, by telephone on 01603 489118, or by post at 1st Floor, Woburn House, 84 St Benedicts Street, Norwich, NR2 4AB.
What Does This Policy Cover?
As a data subject, you have the following rights under the GDPR, which this Policy and Our use of personal data have been designed to uphold:
The right to be informed about Our collection and use of personal data;
The right of access to the personal data We hold about you (see section 12);
The right to rectification if any personal data We hold about you is inaccurate or incomplete (please contact Us using the details in section 14);
The right to be forgotten – i.e. the right to ask Us to delete any personal data We hold about you (We only hold your personal data for a limited time, as explained in section 6 but if you would like Us to delete it sooner, please contact Us using the details in section 14);
The right to restrict (i.e. prevent) the processing of your personal data;
The right to data portability (obtaining a copy of your personal data to re-use with another service or organisation);
The right to object to Us using your personal data for particular purposes; and
If you have any cause for complaint about Our use of your personal data, please contact Us using the details provided in section 14 and We will do Our best to solve the problem for you. If We are unable to help, you also have the right to lodge a complaint with the UK’s supervisory authority, the Information Commissioner’s Office.
For further information about your rights, please contact the Information Commissioner’s Office or your local Citizens Advice Bureau.
What Data Do We Collect?
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Property Portfolio details such as value and mortgage outstanding;
How Do We Use Your Data?
All personal data is processed and stored securely, for no longer than is necessary in light of the reason(s) for which it was first collected. We will comply with Our obligations and safeguard your rights under the GDPR at all times. For more details on security see section 7, below.
Our use of your personal data will always have a lawful basis, either because it is necessary for our performance of a contract with you, because you have consented to our use of your personal data (e.g. by subscribing to emails), or because it is in our legitimate interests. Specifically, we may use your data for the following purposes:
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With your permission and/or where permitted by law, We may also use your data for marketing purposes which may include contacting you by email and or telephone with information, news and offers on our products and or We will not, however, send you any unsolicited marketing or spam and will take all reasonable steps to ensure that We fully protect your rights and comply with Our obligations under the GDPR and the Privacy and Electronic Communications (EC Directive) Regulations 2003.
You have the right to withdraw your consent to us using your personal data at any time, and to request that we delete it.
We do not keep your personal data for any longer than is necessary in light of the reason(s) for which it was first collected. Data will therefore be retained for the following periods (or its retention will be determined on the following bases):
Member profile information is collected with your consent and can be amended or deleted at any time by you;
Anti-Money Laundering information and tax consultancy records are to be kept as required by law for up to seven years.
How and Where Do We Store Your Data?
We only keep your personal data for as long as We need to in order to use it as described above in section 6, and/or for as long as We have your permission to keep it.
Some or all of your data may be stored outside of the European Economic Area (“the EEA”) (The EEA consists of all EU member states, plus Norway, Iceland, and Liechtenstein). You are deemed to accept and agree to this by using our site and submitting information to Us. If we do store data outside the EEA, we will take all reasonable steps to ensure that your data is treated as safely and securely as it would be within the UK and under the GDPR
Data security is very important to Us, and to protect your data We have taken suitable measures to safeguard and secure data collected through Our Site.
Do We Share Your Data?
We may share your data with other partner companies in for the purpose of supplying products or services you have requested.
We may sometimes contract with third parties to supply products and services to you on Our behalf. Where any of your data is required for such a purpose, We will take all reasonable steps to ensure that your data will be handled safely, securely, and in accordance with your rights, Our obligations, and the obligations of the third party under the law.
We may compile statistics about the use of Our Site including data on traffic, usage patterns, user numbers, sales, and other information. All such data will be anonymised and will not include any personally identifying data, or any anonymised data that can be combined with other data and used to identify you. We may from time to time share such data with third parties such as prospective investors, affiliates, partners, and advertisers. Data will only be shared and used within the bounds of the law.
In certain circumstances, We may be legally required to share certain data held by Us, which may include your personal data, for example, where We are involved in legal proceedings, where We are complying with legal requirements, a court order, or a governmental authority.
What Happens If Our Business Changes Hands?
How Can You Control Your Data?
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How Can You Access Your Data?
You have the right to ask for a copy of any of your personal data held by Us (where such data is held). Under the GDPR, no fee is payable and We will provide any and all information in response to your request free of charge. Please contact Us for more details at firstname.lastname@example.org, or using the contact details below in section 14.
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