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How to assign BTL rental income to Ltd?

How to assign BTL rental income to Ltd?

Hello,

A BTL is owned in 99:1 ratio, by a father and son. Both are higher income tax payers. They are looking to assign the BTL rental income to a Ltd.

1. How would they assign the rental income to the ltd?

2. The BTL has a mortgage, can this mortgage payments and all the relevant expenses be reimbursed to the payee from the ltd?

Thanks in advance for your help.

Manzar 

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By mhtax
07th Jan 2013 12:51

Ownership

I do not believe it is possible to assign the right to income to the company without also assigning the underlying asset

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07th Jan 2013 23:33

Asset
There could be SDLT issues transferring asset to ltd co, and the rental income would be the companys not the directors without transferring the asset.

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08th Jan 2013 10:26

Property law

I see no reason in principle why this cannot be done. In effect the owners are granting a lease to the company for nil consideration which then sub-lets the property. This raises a number of issues:

1. What is the nature of the lease? Unless it is a tenancy at will there will be, as mentioned, an SDLT charge.

2. If it is a tenancy at will can the company legitimately grant a longer term sub lease to a third party? If the freeholders gave consent does this create a deemed longer term lease from the freeholders thus leading to SDLT?

A possible solution, if tenancies are relatively short, is for the landlords to grant a lease to the company which then grants a sub-lease for an equal term. The figures may well be small enough to avoid SDLT.

I think this needs input from a property lawyer before going ahead.

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08th Jan 2013 10:48

S.624 ITTOIA 2005?

gbuckell wrote:

I see no reason in principle why this cannot be done. In effect the owners are granting a lease to the company for nil consideration which then sub-lets the property.

Isn't that a settlement? and aren't the settlors retaining an interest in the property?

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08th Jan 2013 10:41

Presumably this is akin

to effectively using the Ltd Co to manage the properties and take a respective fee?....or perhaps this is an actual alternative.

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08th Jan 2013 16:05

Bounty

My understanding is that, for a settlement to exist, there needs to be bounty. Assuming the property owners control the company in the same ratio as the property, there is no bounty.

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08th Jan 2013 17:04

But surely...

... the company isn't transparent? Bounty has been bestowed on the company, notwithstanding that it is owned by the settlors?

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08th Jan 2013 17:31

Bounty on a company?

I am not convinced that bounty can be bestowed on a company. If a company's value is increased it is the shareholders that benefit. Had a quick look to see if I could find support for this view. The only comment I could find was in Example 21 at http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM4355.htm where incorporating a business and leaving undrawn profits within it is not considered bounteous.

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24th Jan 2013 11:47

@gbuckell

Hi Graham,

Apologies for digging this up.  I hadn't seen that you'd responded to the point.

The problem with HMRC's examples is that they are all looking at whether or not there is income shifting between spouses or civil partners. Example 21 is really only considering whether there is a settlement by either Mr or Mrs T on the other spouse.

Is the £30K retained in the company then a bounteous settlement, because the proprietors haven't drawn it as their remuneration.  Probably not if it's done for commercial reasons - the expectation it to fund the future growth of the company.

That is a different situation though to the transfer of valuable property (an interest in land) by one person (an individual) to another person (the company) without the requirement for a market reward.  There's no commercial purpose; the individual could have exploited the interest in land personally to the same overall gain, but he's made a gratuitous transfer to the company, for the sole purpose of enjoying the income from it later, when his personal tax circumstances suit him.

Is the gratuitous transfer of the property to the company not bounteous and, therefore, a settlement? (See TSEM4105) And is this not the purpose of the legislation?

I'd never considered the possibility of a company being the recipient of settled property to which the legislation applied, but then was alerted to the possibility by comments made by Roger Jones in his chapter on CT developments for OMBs in the 2011/12 Taxline Tax Planning (Chapter 1, page 14), considering how it might be claimed that profits might be settled on an inert corporate partner in a trading partnership with the individual that owns that corporate partner.

Income being settled on the company and in which the settlor had an interest by virtue of being the shareholder of that company.

The text of the legislation gives it vast potential application.  All that is necessary is that one person settles property on another person under a bounteous arrangement and that there are or may be circumstances in which that property or any related property (which includes the incom from the property) will pass or be applied for the benefit of the settlor (or their spouse or civil partner).

HMRC sought to apply the settlements legislation to spouses, because such arrangements were rife and fell so squarely within the definition of settlor interested settlement and had the clear purpose of directing income from the higher taxpaying spouse to the lower taxpaying spouse.

If the popularity of this approach to property rental increases.  Will they stand idly by in the current climate one wonders?  Or might the waters be tested?

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24th Jan 2013 12:26

Settlements

You raise some interesting questions!

As you rightly state, the scope of the legislation is potentially very wide.

You suggest that leaving £30k inside a company is not bounteous if done for commercial reasons. If one accepts this view, however, there are many many cases where funds have been left inside companies when there are no requirements to fund the future business.To the best of my knowledge, HMRC has never sought to invoke the settlements legislation in cases of incorporation or leaving profits inside to avoid higher rate tax.

Whilst I cannot categorically rule out the possibility in the future such an attempt would open a huge can of worms and undermine the tax system even more! Assuming that HMRC has considered this possibility (which one suspects is quite likely), it has probably been consigned to the "too difficult" pile!

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24th Jan 2013 13:28

The "too difficult" pile

Could become the "one for the GAAR" pile!

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