I have a H&W partnership that own a property portfolio with £1.5m equity. I calc the pregnant gains at £3m.
The H&W are both in their 60's. I don't have much experience with IHT so employed an IHT advisor. We went through the various options such as gifting into Discretionary Trusts, but the landlord has zero cashflow so couldnt afford CGT on the transfer also the periodic trust charges. Ditto with transferring to kids/grandkids (even just NRB) - they can't afford to pay any CGT as the business is cash negative for various reasons.
The only solution offered was to insure the entire IHT liability - which they couldn't afford!
Can anyone advise on potential solutions here other than insolvency? There is no prospect of further financing any of the properties. I'm wondering whether the porfolio can be s162'd into a Limited company, but how would you get the shares into the kids names? Also presume the properties would need to be conveyanced into the company, so it would incur more fees, assuming the lenders would even consent.
If the clients were to do nothing at all who would control the business whilst assets were being sold off to pay the IHT bill?
Thanks for any advice
Replies (23)
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If the properties have £1.5m
If the properties have £1.5m of equity what is the reason for not being able to release any of it?
I would
Incorporate the existing "partnership" as an LLP to both ensure partnership treatment for SDLT purposes, and strengthen your s 162 position. There is no SDLT or CGT on incorporation of an LLP.Transfer the property business to a limited company (Newco), with s 162 relief. There should also not be any SDLT on the transfer by operation of FA 2003, Sch. 15.Transfer £650K worth of shares in Newco into a trust, and claim s 260 relief. There will not be any stamp duty.At least 3 months later, but not so long that there will be a substantial increase in the value of the shares, transfer the shares to the kids, and claim s 260 relief. There will not be any stamp duty.Do a further transfer of shares via the trust in another 7 years time.
You could omit stage 1, if you are sure that it is genuinely a partnership, rather than just jointly owned properties.
Assuming that there is debt on all properties, the IHT advisor's suggestions would also have caused SDLT liabilities.
Probably not
Provided the shares come back out of the trust in a short (but more than 3 months) timeframe, there are no periodic charges, but there will be an exit charge. If the shares have not increased significantly in value over that time it may still be within the nil rate band, and the tax might be as low as 0.15% on any excess.
Gap
Portia
Do you consider there should be a gap between steps 1 and 2 and, if so, how long?
Fellowcraft
May not need to convey properties if existing title owners ceclare that they hold the properties on trust for the company. Whether this avoids the need for lenders' consent is another question although doubtless some would say no on the grounds that the lenders do not need to know!
Probably
Learned Mr Buckell
Yes, I think the LLP needs to have carried on the business prior to step 2, which would not be the case if setp 2 immediately followed step 1. I do not think there needs to be any particular length of time, provided the LLP does at some point carry on the business.
The approach does risk the wrath of Ramsay (not Elisabeth Moyne), if one step simply follows the other.
On the assumption that the clients are in good health, a few months of carrying on the business may be worthwhile to help stave off any challenge.
Portis ...
... a couple of points.
1: They can't repeat the trust exercise in seven years any more without tax charges because of the new single lifetime trust allowance rules
2: If the settlors (ie the parents) have had no other chargeable transfers in the preceding seven years there can't be an IHT exit charge after three months even if the shares have gone up in value.
Ooh!
1: They can't repeat the trust exercise in seven years any more without tax charges because of the new single lifetime trust allowance rules
Has that already become law? I must have missed it?
I accept point 2. I can never remember how the exit charge before the first principal charge is calculated, but now that you have made me look, and I agree with you.
Not law yet
But no indication that it won't be. It only dropped out of FA 2015 because of lack of time. And HMRC said it would apply to all new trusts created from June 2014 when it was legislated - so I wouldn't have thought anybody ought to be relying on the 7 year repeat just at the moment. Yet another useful weapon in the armoury removed from our grasp.
I don't think so
The way I understand the proposal is that a taxpayer will have a single lifetime allowance of £325k for gifts to trusts, and everything above that is taxable. Same principle as the £10m for ER except that you can choose which trust to use it on if you have more than one.
I suspect we'll learn more tomorrow.
Portia
What about para 17A sch 15 FA 2003 causing SDLT re the money's worth shares being issued within 3 years (if it's currently jointly owned)?
Para 17A
Unless I am misreading it, para 17A appears to refer to transfers to a partnership, not from a partnership
Justin
Para 17A does not apply. No money or money's worth is being withdrawn from the partnership.
A chargeable interest is being transferred from the partnership to the limited company and para. 18 applies.
gbuckell
You have missed my point. Portia says use the LLP in case there is doubt about there being a general partnership. If joint owners transfer to an LLP under para 10 sch 15 and then do a s162 incorporation into a Ltd within 3 years, then why is the money's worth value of the shares issued to the LLP members not subject to SDLT under para 17A (2)?
Portia
Why are the shares issued not within para 17A? It is not obvious to me that they are not within it. I am not saying you are wrong, but it may be safest to wait 3 years.
Justin
There is no "money's worth". The shares are being issued in exchange for a consideration equal to their value; the properties. Para. 18 then fixes the amount of that consideration for SDLT purposes.
You should consult with a good tax lawyer! :)
Portia
Why are the shares not money's worth? If I offer you a £1m painting for your £1m house, that is money's worth and subject to SDLT isn't it, just like if I offer you £1m worth of shares? Para 18 is irrelevant to para 17A.
How will S162 work here
We are told equity is £1.5 but pregnant gain £3. I thought that only that part of the gain that brought the new shares issued value to zero could be deferred, so in this instance surely £1.5 of the gain applies against the shares and £1.5 falls in to charge?
Certainly the worked examples I have looked at appear to indicate this, or am I missing something. (Quite possible)
To expand
http://www.hmrc.gov.uk/manuals/cgmanual/cg65740.htm
Computation
There are three stages in the computation of relief under TCGA92/S162.
The gains and losses arising on the transfer of chargeable assets to the company are computed in the normal way. Chargeable gains and allowable losses so computed are aggregated.The proportion of aggregate net gains appropriate to the consideration in shares is established and is deducted from the cost to be allowed when the shares are disposed of. The amount deducted cannot exceed the cost of the shares, see below.The balance of aggregate net gains, that is, the proportion attributable to consideration other than shares, is chargeable for the tax year in which the disposal of the assets took place.
Where the transferor and transferee company are connected persons the market value rule will apply to the consideration to be taken into account for the disposal, see CG14560+.
Edit-wrong example posted.
Okay
And these shares that you say are money's worth. How have they been "withdrawn from the partnership"?
@DJKL I think you are correct. The alternative would be for the company to purchase the properties for an amount equal to the existing debt, and raise the purchase moneys by loan. CGT would then be due to the extent that it is apportionable to the non-cash consideration.
EDIT: Crossed with your posting of HMRC's entire CGT manual! :)
Sorry, to make matters worse I posted wrong example,
And these shares that you say are money's worth. How have they been "withdrawn from the partnership"?
@DJKL I think you are correct. The alternative would be for the company to purchase the properties for an amount equal to the existing debt, and raise the purchase moneys by loan. CGT would then be due to the extent that it is apportionable to the non-cash consideration.
EDIT: Crossed with your posting of HMRC's entire CGT manual! :)
Sorry, to make matters worse initially posted the wrong example (Part cash/part shares), have now posted the gain exceeds share value issued example (which is much shorter)
Here is correct HMRC example re gain greater than shares issued
CG65765 - Transfer of a business to a company: example: relief restricted to cost of shares
A transfers his business together with all its assets to A Ltd in consideration for an issue of 100 shares in A Ltd. The only chargeable asset of the business is self-generated goodwill. The value of the business transferred is agreed as follows:
Market value at the date of transfer:
£Goodwill50,000Non-chargeable assets20,000Cash5,000 75,000Less creditors51,000Net value of business24,000
The gain arising on the disposal of goodwill is £50,000 as there are no allowable acquisition costs.
The whole of the gain of £50,000 on the transfer of goodwill is attributable to shares as there was no other consideration. However, the amount to be deducted from the cost of the shares cannot exceed their cost, £24,000. Therefore, the revised cost of the 100 shares in A Ltd is (£24,000 - £24,000) £nil.
The balance of the gain, (£50,000 - £24,000) £26,000, is chargeable in the tax year in which the transfer took place.
http://www.hmrc.gov.uk/manuals/cgmanual/cg65765.htm
If anyone has a cunning plan past this obstacle I have clients who would be very interested.
Portia
Money's worth has been withdrawn from the LLP into my hands, since as a member I have received valuable shares due to the LLP disposing of its properties (just like if the LLP sold its properties to a 3P and I received cash for a prior loan or re my capital account). Anyway, it seems safer to wait 3 years unless you have a killer counter argument here. I do have a very simple solution to this, but it is valuable IP so I cannot share it with you here.