22 Jun 2020 – Guest Post by Mark Alexander of Property118.com
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.
I will begin with a simple overview of his circumstances when he first approached us.
- Rental property business value £12million
- Base costs £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.
His company DID have to pay Stamp Duty Land Tax to complete the incorporation transaction but Multiple Dwellings Relief applied. If his business had been a partnership then SDLT may not have been payable.
Prior to his incorporation we arranged a £4million overdraft to enable him to withdraw his personal capital investment from the business. At the point of incorporation this funding was novated to his company. 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 now 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. This linked HMRC manual provides several very simplistic examples of the use of this structure, thus confirming it does not fall foul of either DOTAS or GAAR. 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
The next stage of tax planning was to cap the value of his shares for inheritance tax “IHT” purposes.