Entrepreneurs relief available?

Entrepreneurs relief available?

Didn't find your answer?

Further to a recent question of mine, I have been tasked with finding a way around the 28% rate of CGT for a client of mine who wishes to dispose of his entire residential letting portfolio.

The thought occurs that if he changed the portfolio, en masse, to FHL's and met all of the relevant qualifying criteria, (for both FHL and ER), he should qualify for entrepreneurs relief.

Thoughts............?

Also - every property has considerable enhancement expenditure attached. I assume this would still be allowable? (I can't think of any reason why not)

Many thanks

Replies (24)

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By pembo
24th Jul 2014 15:15

in theory

what you propose would work as the sale of the properties would, assuming all qualifying ER and HL conditions are otherwise met,be an associated disposal and thus eligible for ER. BUT and this is a big one the gain would be subject to apportionment taking into account the period the properties were let. Thus the element subject to ER would depending on the period of ownership be likely minimal and not worth the hassle of "conversion". The ER part would of course increase the longer run as HL but as a tax planning exercise don't go there unless the sums justify the hassle..

The second query is yes such costs would be added to the base cost in any event.

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By cathygrimmer
24th Jul 2014 16:45

@ Pembo

 I don't see how there would be an associated disposal if the client is running the FHL's himself? Unless I've misread the question, there's no company or partnership involved.

As apportionment only applies to associated disposals, in theory, this could work if the FHL conditions were met for a full year. That in itself might be a challenge if these are normal residential properties.

But HMRC might contend that a sale of a property in isolation would be the sale of an asset not the sale of part of the business so you might need to cease 'trading' as FHLs entirely before any are sold! Depending on how many properties there are, what they are like and where they are situated (i.e. how difficult would it be to meet the FHL letting conditions?), it might be hard to achieve. 

Cathy

[email protected]

 

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By unclemonty
24th Jul 2014 17:47

Some meat on the bones

I was a little perplexed by pembo's answer and more encouraged by Cathy's so will add some more detail.

The portfolio consists of seven properties, (30+ units), run in his own, (or jointly with his wife), name, that are all capable of being let as FHL. They are all within walking distance of the sea, in a typical tourist area, and a change of use, (from purely residential), should pose no significant problem.

The properties were purchased between 1984 and 1996 and some have seen substantial capital improvement.

The entire portfolio being sold would generate profits >£5m, so there's a lot at stake here.

My reading is that provided all FHL and ER qualifying criteria are met then this could work. If the portfolio had to be traded as FHL's for a few years, this would also be viable, (although if it only needs twelve months to qualify I can't see the need to trade longer).

Any more thoughts.............?

Thanks

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By GuestXXX
17th Mar 2015 17:11

.

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By pembo
25th Jul 2014 10:24

partnership

Cathy is of course correct...it was stifling in my office yesterday !! Your meat on bones however is useful as why not gift the ones that are not owned jointly with his wife into joint ownership and then commence trading as a FHL partnership. My prior point about apportionment applies however and thus the time apportioned gain to this point would not qualify for ER under the associated disposal rules. That said with these sort of gains if they are prepared for the potential hassle of doing it for a few years the saving could be substantial. As Cathy states they would however need to cease trading entirely and sell all properties within 3 years to play safe with ER.

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By unclemonty
25th Jul 2014 16:37

Are you sure, pembo?

I'm still not convinced that they'll be time apportioned.

The ER rules state the qualifying period to be 12 months, so my reading is that an FHL 'business', (in this case either sole trade or jointly owned), will qualify, no matter the length of ownership of the properties. If it qualifies, it qualifies, no?

However - 'if it were that simple, many more would have done it' springs to mind.

Any alternative views?

Thanks

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Portia profile image
By Portia Nina Levin
02nd May 2015 12:30

(No subject)

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By unclemonty
28th Jul 2014 14:11

So, to summarise....

.......we think it would qualify provided that the FHL criteria are met for a full twelve months.

It is unlikely that the properties will all be sold at the same time but I assume that marketing them and 'running the business down', until they are all sold, will be fine, as long as they're all gone within three years?

Can bookings be taken for the remaining properties in the meantime?

Can the properties be sold as residential or must they be marketed as FHL's?

Appreciate all of the input thus far and I think I know which way I'm going to advise on this but will leave it open for a few more days, to gather further comment.

Thanks

 

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By pembo
29th Jul 2014 10:05

Rereading

guidance in this area agree that the key point is whether they are business assets or associated assets. If the former then nothing more would need to be done with ownership as long as the owner ran them as FHL for a year then ER would subject to other conditions be available. The problem is the business of the client and his wife would be that of running a portfolio of FHL so if this were to succeed my view remains as Portias and a piecemeal cessation would be dangerous. Piecemeal sale within 3 years fine but not cessation.

Portia/Cathy you seem pretty sure that these are material business assets. I tend to agree but given (1) the numbers and (2) GAAR (lets face it the only reason to do this is to save tax) think the OP needs to sleep easy. Were this me I would  get a written opinion from someone at PWC or whoever. Have done this a few times over the years where although you're 99.99% certain the tax at stake makes you very uneasy. Should be no problem swinging this with the client given the sums involved and HMRCs current attitude to blatant avoidance.

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By cathygrimmer
29th Jul 2014 10:37

@pembo

I think you'll find I said it wouldn't be an associated disposal (which clearly it won't be as there is no company or partnership involved) and that in theory it could work. I would hope that the OP was testing the water here and wouldn't give their client 'definitive' advice based on general comments on AWeb from people who, as far as he knows, may not be qualified to give such advice! 

Personally, I think commerciality would be the key here but, you are right - the OP should get written advice from a specialist if only for their only protection.

It should, however, be remembered that an affirmative opinion from PWC (or anyone else for that matter) won't carry any weight with HMRC and, unless given with no caveats, won't give the client someone to sue if HMRC take an alternative view which is accepted or upheld by the courts!

Cathy

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Replying to Wilson Philips:
Red Leader
By Red Leader
29th Jul 2014 11:53

@OP

You may want to consider referring the client to an expert so as to save yourself the potential for any comeback. It sounds like a mega-gain for a small practice to advise on!

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Replying to leshoward:
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By Alexdon
29th Jul 2014 13:12

Expert Opinion

Red Leader wrote:

You may want to consider referring the client to an expert so as to save yourself the potential for any comeback. It sounds like a mega-gain for a small practice to advise on!

I think this is by far the best course of action. Better than you seeking advice and then passing it on. You wouldn't want "Chinese Whispers"

 

It is a "Win Win" situation

It ensures your client gets expert, specific and detailed advice. You have undertaken your duty to your client by giving the best advice you are able to (see an expert), and hopefully your client understands and is grateful for your endeavours in ensuring the best possible outcome.

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By unclemonty
29th Jul 2014 14:52

A big firm referral...........

..............is what I'll advise.

I'm happy with the research I've conducted, and the feedback given on here, and other fora, and think that the client should be happy that I've thought of a plan that may mitigate some fairly large liabilities. When all is said and done, however, the client will want surety and I'm not in a position to provide that to the extent that they would want.

I appreciate all of the input. Many thanks.

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By pembo
29th Jul 2014 15:04

think we're there with this

Using the tried and trusted "this is an extremely complex area...blah blah...what would your GP do if he suspected a highly unusual cardiac problem.. etc"...approach get the written opinion from an "expert". If we were talking £500k gains I'd maybe take a caveated punt but £5m no chance. Cathy's right that most of them have disclaimers like so called counsels opinion (not worth the paper) but the main point is it gets you out of a potentially nasty situation a large excess and hike in premium if it went pear shaped. And of course you can add a hefty loading for your time and wisdom and the expert gets to buy you lunch at a very expensive pad. Win win win.

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Portia profile image
By Portia Nina Levin
02nd May 2015 12:29

(No subject)

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By unclemonty
29th Jul 2014 16:51

Portia - it's important to note........

..........that whether the client sells may well be driven by the tax liabilty arising.

He feels it's 'unfair' that something he has run as a business for nigh on 30 years, dedicating pretty much a full working week to, should be classed as different than my business, for instance. I have to say I'm inclined to agree with him.

 

 

 

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By pembo
31st Jul 2014 11:28

SFA ??

PNL forgive me but not being of a certain age Wikipedia came in useful and if you do not think 18% of £5m or whatever is "SFA" then what exactly is "SFA" ? Agree with OP that its high time that running resi portfolios full time is classified as a trade. However on the other hand nice "problem" to have and as someone who to whom money means "SFA" above the absolute necessities of life maybe console him/her that should said plan fail the additional 18% may only be 10.8% after IHT ?

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By awoodj
31st Jul 2014 12:42

Moving out of country

For the amounts in question have they seriously considered becoming non-resident as an alternative approach? Given the funds they would have at their disposal it might not be such a bad option if their personal circumstances/preferences made it viable.

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Replying to lionofludesch:
Red Leader
By Red Leader
31st Jul 2014 12:35

lest we forget

Mehjoo v Harben Barker

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Portia profile image
By Portia Nina Levin
02nd May 2015 12:29

(No subject)

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Portia profile image
By Portia Nina Levin
02nd May 2015 12:28

(No subject)

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Replying to Tax Dragon:
Red Leader
By Red Leader
31st Jul 2014 14:54

oh come off it

What are you saying? Because the case was won by the accountant on appeal, it's irrelevant?

Ask the defendant and the defence expert witness! I've heard the latter's view and it was not pretty.

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By pembo
31st Jul 2014 15:33

don't think

mehjoo is of much relevance in this case. That was based on a failure to advise although quite properly HB won on appeal. If the OP advises the HL plan and it does go pear shaped then that is a completely different matter unless precautions are put in place as previous posts.

@ Portia I did a bit of research round our office and we had amongst other suggestions "Super Furry Animals" and "saturated fatty acids" that obviously did not make sense. That is when I googled it although these days the [***] bit seems to have been dropped in favour of another F word that is inappropriate for this forum.

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Portia profile image
By Portia Nina Levin
02nd May 2015 12:27

(No subject)

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