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CGT cut to 20% - is it still worth advising clients to incorporate rental property businesses?

CGT cut to 20% - is it still worth advising...

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I don't have clients with enough property income to warrant incorporation but it intrigues me that this is being done by a lot of landlords right now. Is it really worth it? It surely makes assumptions as to the proportions of rental profits vs capital gains, and today's CGT cut must swing the balance back towards not incorporating? 

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By whatdoyoumeanwashe
16th Mar 2016 14:55

Oh yes, I see that now. I think he neglected to mention that fairly major caveat! I was starting to think he'd had a personality transplant and didn't want to kill off landlords after all.

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Hallerud at Easter
By DJKL
16th Mar 2016 15:33

Landlords; the new bankers.

whatdoyoumeanwashe wrote:

Oh yes, I see that now. I think he neglected to mention that fairly major caveat! I was starting to think he'd had a personality transplant and didn't want to kill off landlords after all.

Cannot be seen to be pleasant to the sector of the economy that has now taken over from bankers in the public's affections.

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By DB1
16th Mar 2016 22:20

I think the propaganda is working!

DJKL wrote:

whatdoyoumeanwashe wrote:

Oh yes, I see that now. I think he neglected to mention that fairly major caveat! I was starting to think he'd had a personality transplant and didn't want to kill off landlords after all.

Cannot be seen to be pleasant to the sector of the economy that has now taken over from bankers in the public's affections.

Successive governments build no new council houses for generations sell off the existing stock restrict land release for new housing of any type and then blame landlords for the increase in house prices in general and the increase in numbers of private rented properties ! You couldn't make it up !!

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By cfield
21st Mar 2016 11:36

Budget speech

whatdoyoumeanwashe wrote:

Oh yes, I see that now. I think he neglected to mention that fairly major caveat!

He did actually. He said the new rates wouldn't apply to residential property which would continue to be taxed at the old rates.

Easy to miss bits though in the "bear garden" atmosphere of the Budget speech. I reckon the Speaker should have a hose pipe he can use to spray the members who won't shut up whilst the Chancellor (or indeed the Leader of the Opposition) is talking.

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Hallerud at Easter
By DJKL
21st Mar 2016 11:15

Be careful . you reap what you sow.

cfield wrote:

whatdoyoumeanwashe wrote:

Oh yes, I see that now. I think he neglected to mention that fairly major caveat!

He did actually. He said the new rates wouldn't apply to residential property which would continue to be taxed at the old rates.

Easy to miss bits though in the "bear garden" atmosphere of the Budget speech. I reckon the Speaker should have a hose pipe he can use to spray the members who won't shut up whilst the Chancellor (or indeed the Leader of the Opposition) else is talking.

I would think very long and hard  before implementing your proposal, I think you have not fully thought through the consequences of your actions . (At least that is consistent with our elected representatives)

Given some of the denizens of the House of Commons I am not sure even the British public could stomach what would  effectively be a wet T shirt contest.

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By cfield
21st Mar 2016 11:35

Wet shirts

DJKL wrote:

Given some of the denizens of the House of Commons I am not sure even the British public could stomach what would  effectively be a wet T shirt contest.

We could if it was them!

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By DB1
16th Mar 2016 16:16

Corporation tax 17 % by 2020
I would of thought most would incorporate to save tax on profits rather than CGT implications?

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By jon_griffey
16th Mar 2016 17:32

Dividend tax

A reduction in the corporation tax rate to 17% will go a very long way to negating the dividend tax.

A quick calculation, using 17% CT suggests that a basic rate taxpayer suffering the 7.5% dividend tax will have an effective tax rate of 23.225%.  That's without taking into account the benefit of the £5,000 allowance.

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By whatdoyoumeanwashe
16th Mar 2016 18:11

This compared with 20% basic rate income tax and 18% CGT. Depending on the size and rate of the mortgage and therefore the impact of the interest relief restriction for a higher rate taxpayer, they could well be better off owning the property directly, unless they were deemed to be running a business as opposed to investing, and so hit with class 4 NI as a sole trader. Am I missing the point?

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By DB1
16th Mar 2016 19:15

Thanks Jon , I would of thought that would be quite a substantial pull for most people.

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By petestar1969
21st Mar 2016 15:35

Hmm

DB1 wrote:
Thanks Jon , I would of thought that would be quite a substantial pull for most people.

 

"would have" mate not "would of", that's twice you got it wrong.

 

Anyway I have a BTL landlord client with 12 rental properties. He was quoted £30,000 by someone (not me) to transfer all his properties to an LLP or limited company.

He told them where to go. No amount of tax saving would make it worth spending so much...

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Portia profile image
By Portia Nina Levin
21st Mar 2016 15:53

Surely...

petestar1969 wrote:

Anyway I have a BTL landlord client with 12 rental properties. He was quoted £30,000 by someone (not me) to transfer all his properties to an LLP or limited company.

All of his rental properties, mate.

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By keithas
24th Mar 2016 16:30

Not necessarily

Portia Nina Levin wrote:

petestar1969 wrote:

Anyway I have a BTL landlord client with 12 rental properties. He was quoted £30,000 by someone (not me) to transfer all his properties to an LLP or limited company.

All of his rental properties, mate.

From Cambridge dictionaries Online:
"We often use of after all in definite noun phrases (i.e. before the, possessives and demonstratives), but it is not obligatory"

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By petestar1969
24th Mar 2016 16:46

Porsche...

Portia Nina Levin wrote:

petestar1969 wrote:

Anyway I have a BTL landlord client with 12 rental properties. He was quoted £30,000 by someone (not me) to transfer all his properties to an LLP or limited company.

All of his rental properties, mate.

 

"All" and "All of" are both correct they are interchangeable.

 

"Would of", however, is bad grammar.

The contraction of "would have" is "would've" but some illiterate people think its "would of" (probably influenced by some American TV show)..

 

 

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By whatdoyoumeanwashe
24th Mar 2016 17:07

Are you serious? It's "it's", not "its"!

petestar1969 wrote:

Portia Nina Levin wrote:

petestar1969 wrote:

Anyway I have a BTL landlord client with 12 rental properties. He was quoted £30,000 by someone (not me) to transfer all his properties to an LLP or limited company.

All of his rental properties, mate.

 

"All" and "All of" are both correct they are interchangeable.

 

"Would of", however, is bad grammar.

The contraction of "would have" is "would've" but some illiterate people think its "would of" (probably influenced by some American TV show)..

 

 

If you're going to insist on correcting other people's grammar you need to get your own grammar correct. Otherwise you just look like an idiot.

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Hallerud at Easter
By DJKL
24th Mar 2016 17:33

Would off

petestar1969 wrote:

Portia Nina Levin wrote:

petestar1969 wrote:

Anyway I have a BTL landlord client with 12 rental properties. He was quoted £30,000 by someone (not me) to transfer all his properties to an LLP or limited company.

All of his rental properties, mate.

 

"All" and "All of" are both correct they are interchangeable.

 

"Would of", however, is bad grammar.

The contraction of "would have" is "would've" but some illiterate people think its "would of" (probably influenced by some American TV show)..

 

 

I would off that cop if I thought I could make a getaway.

From preposition to verb in one bound unleashed; English ,well American English in this case, is a living entity.

 

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By bernard michael
17th Mar 2016 10:35

Just a thought. How will they apportion the CGT on a commercial premises with a flat over.

Will it have to be independent valuations of each part.

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Hallerud at Easter
By DJKL
17th Mar 2016 10:57

How does it work for stamp duty?

bernard michael wrote:

Just a thought. How will they apportion the CGT on a commercial premises with a flat over.

Will it have to be independent valuations of each part.

Have never had to deal with, how does it work for stamp duty , that may give a clue re apportioning price?

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By The Minion
17th Mar 2016 12:18

i would hesitate to look to SDLT to simplify

understanding of any kind of tax.

 

As far as the what happens with a flat above a shop. I think that will fall into the osbourne book of the "My goodness principle" as in "My goodness i hadn't realised that would cause any complications! I am sure it wont complicate the interaction of renovation allowance etc.I am sure that the tax avoiders among you (serial or otherwise) wont use this as a way of avoiding any tax liabilities - of whatever kind..."

 

 

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By Portia Nina Levin
24th Mar 2016 16:32

What does this irreputable online resource say about using "of" in place of "have"? Does it say that it is perfectly acceptable?

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By keithas
24th Mar 2016 16:55

No

Portia Nina Levin wrote:
What does this irreputable online resource say about using "of" in place of "have"? Does it say that it is perfectly acceptable?

No it doesn't. Your point is?

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By michaelblake
24th Mar 2016 17:09

 Rules will be set out !

 

Rules will set out how gains should be calculated in the case of mixed use properties. Subsection 4(3A) of TCGA, which applies a 28% rate of CGT to ATED-related chargeable gains, is unchanged by this measure.

https://www.gov.uk/government/publications/changes-to-capital-gains-tax-...

 

 

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By michaelblake
24th Mar 2016 17:25

And here they are

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

See notes on Clause 72 Finance (No 2) Bill 2016 at Page 189

Schedule 12: Disposal of residential property interests: Gains and losses 

33. Paragraph 5 inserts new Schedule 4ZZC into TCGA 1992.

34. New Schedule 4ZZC, Part 1 consists of paragraphs 1 and 2, which introduce the Schedule and define various terms.

35. New Schedule 4ZZC, Part 2 consists of paragraphs 3 to 6. This Part contains the rules for computing the amount of residential property interest (RPI) gain or loss in a case where the disposal does not involve a disposal that is chargeable to ATED-related CGT.

36. Paragraph 3 of new Schedule 4ZZC introduces Part 2.

37. Paragraph 4 of new Schedule 4ZZC provides that the RPI gain or loss is that proportion of the gain or loss over the period of ownership (since 31 March 1982) that reflects the amount of days in which the asset is used as a dwelling; and any mixed use on the same day is apportioned on a just and reasonable basis.

38. Paragraph 5 of new Schedule 4ZZC provides for the amount of gain or loss on the 

it looks like our old friend "just and reasonable" has another role.

 

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By michaelblake
24th Mar 2016 17:39

What is just and reasonable

The interesting discussion may be around what is "just and reasonable" and from whose perspective.

Consider the following - the asset disposed of is a residential cottage worth £200,000 with a total ground floor area including garden of 0.10a forming part of a larger asset which is a farm of 100a worth £1,500,000.

On an acreage basis a just and reasonable apportionment would be 1/1000

On a value basis a just and reasonable apportionment would be 2/17 

Is just and reasonable the result that gives the most tax to the exchequer or the one that gives the least tax to the exchequer, or somewhere in between the two, and who decides? 

If SP/D1 was adopted to treat the cottage as the asset the whole of the gain would be liable at the higher RPI rate. 

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By pauljohnston
31st Mar 2016 09:01

I suspect that what we will see

is that Landlords will buy new property in a Ltd Co if they can raise finance to do so.  For any landlord who re-invests all his rents a Ltd Company may well produce  abetter result, even if there is cost of transfer.

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By brian-scholar
31st Mar 2016 10:42

If property income

had previously been included in property pages and we now need to justify that it is a business to claim capital gains tax holdover relief, will HMRC come back and charge class 4 NI on previous years profits?

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By Portia Nina Levin
31st Mar 2016 11:27

No

brian-scholar wrote:

had previously been included in property pages and we now need to justify that it is a business to claim capital gains tax holdover relief, will HMRC come back and charge class 4 NI on previous years profits?

There is a difference between a business and a trade.

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By Montrose
31st Mar 2016 12:47

I think Paul Johnston is right.

Accepting that the 3% SDLT surcharge on buy to let is here to stay, there is  much to commend future purchases being through an Ltd company, not an LLP, and funding them by way of  shareholder loans. The company will only suffer 18% maximum CT [but still 28%  tax on chargeable gains ], and the net cash flow can be drawn tax free by way of repayment of loans.

Corporate mortgage interest is not-yet- restricted for CT other than for multinationals.

For elderly investors, the loss of CGT rebasing on death could argue against this.

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By Portia Nina Levin
31st Mar 2016 12:50

Eh? Come again? No 1

Montrose wrote:

[but still 28%  tax on chargeable gains ]

Why would a company pay 28% CGT on gains on residential properties that are being let to unconnected third parties?

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By Portia Nina Levin
31st Mar 2016 12:52

Eh? Come again? No 2

Montrose wrote:

For elderly investors, the loss of CGT rebasing on death could argue against this.

Why are the shares in their companies not being rebased on these elderly investors' deaths?

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By Montrose
31st Mar 2016 14:10

I always enjoy your comments Portia

No 1. ATED related gains are chargeable at 28%, not CT rates, and apply to properties in excess of £500,000.

No 2 The unrealised gains  on increases between property acquisition  and death remain chargeable in the company, which itself  does not enjoy  rebasing.at death. This is of course just a particular aspect of the two stage charging of gains

I) within a company and 

ii) to the shareholder on disposal of shares

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By Portia Nina Levin
31st Mar 2016 14:23

And a gain on a residential property owned by a company but let to unconnected third parties is an ATED-related gain is it?

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By Ruddles
31st Mar 2016 15:50

Yes (possibly)

Portia Nina Levin wrote:
And a gain on a residential property owned by a company but let to unconnected third parties is an ATED-related gain is it?

Yes, it is - depending on value

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By The Minion
31st Mar 2016 14:48

please excuse a late in the tax year stupid question

I know little if anything about ATED.

 

When it is referred to as "properties in excess of £500k" i am right in that it is a per property basis not a company with properties that add up to more than said £500k?

 

I am hoping that the answer is as obvious as it seems...

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By Portia Nina Levin
31st Mar 2016 14:49

It applies to single household dwellings.

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By The Minion
31st Mar 2016 15:08

Thanks PNL

Like i said - late in the tax year stupid question.

 

I can now stop worrying about word games...

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By Portia Nina Levin
31st Mar 2016 16:43

Okay.

Say that there is a residential property owned by a BVI resident company that was purchased on 5 April 2000 for £3 million. Its value on 5 April 2013 was £5 million. Its value on 5 April 2015 was £6 million and it will be sold on 5 April 2016 for £7 million.

At all times between 5 April 2000 and 5 April 2016 the property has been let to a party that is unconnected with the company and its shareholders.

What gain is liable to UK capital gains tax, how much of the gain is an ATED-related gain, and at what rate(s) is the gain taxable?

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By Ruddles
31st Mar 2016 17:12

The first part of the question is easy

None of it.

It's Friday, and I can't be bothered to work out the rest. Your example neatly illustrates the complexity of the legislation. At its basic level, though, an ATED-related gain - absent any interaction with non-resident rules - is one on a property in respect of which, absent the various reliefs, would have suffered an ATED charge.

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By cfield
31st Mar 2016 17:22

Calendar confusion

Ruddles wrote:

None of it.

It's Friday, and I can't be bothered to work out the rest.

Actually it's Thursday today. It's the end of the month, not the end of the working week.

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By Portia Nina Levin
31st Mar 2016 17:30

You need to read a bit further in the legislation then. You appear to have only got as far as paragraph 2(5)(b) of Schedule 4ZZA.

Paragraph 3 determines how much of a gain is ATED-related using the formula CD/TD, where TD is total days and CD is chargeable days.

Chargeable days is defined as being a day to which condition C in section 2C(4) applies. Condition C does not apply if the day is a relievable day.

All days in my example are relievable days, meaning that there are no days to which condition C applies with the effect that CD = 0, so that CD/TD is also 0, meaning that none of the gain is an ATED-related gain.

The gain liable to capital gains tax is £1 million (being the NRCGT gain that has accrued since 6 April 2015) and it is chargeable to tax at 20% by virtue of section 4(3B)(a).

Oh, and today is only Thursday!

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By Ruddles
31st Mar 2016 18:26

It's Friday for me :)

You're right, Portia - I should have read further before jumping in feet first.

My previous answer stands - yes (possibly) - but I should have added further qualifications.

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