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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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.
@ 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
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.
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.
@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
@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!
Expert Opinion
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.
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.
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 ?
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.
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.
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.