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Incorporating investment property and trusts

Is it worth incorporating an investment property business before transferring into trust?

Help please

I have a client who holds three buy to let properties worh around £10m in total, two in a partnership with his family and one personally. He has substantial borrowing against the properties and is worried about the impact of HMRC restricting loan interest relief. He also wants to reduce his likely IHT bill.

One option is to incorporate the business to be able to preserve full interest relief for the borrowings. Rollover relief could be claimed for CGT. But no BPR will be available for the shares on death unless the company is converted into one which is not an investment company, eg a property development company. 

Alternatively he could transfer the properties into trust, and providing he survives 7 years and the trust is structured correctly then there will be cgt holdover relief on transfer into trust and the properties will fall out of his estate for IHT purposes.

But what if we take this one step further and he incorporates the property letting business into a company before he transfers the shares into trust?  Is there any advantage/disadvantage in this (apart from the availability of claiming full tax relief on the interest vs extracting the profits and the usual Company Tax admin nightmare). I only usually deal with personal tax not corporation tax so would welcome advice.

Thanks in advance

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24th May 2018 13:56

What makes you think rollover relief will be available?

The fact that there are only three rental properties, it is very unlikely to constitute a business for the purposes of s162.

What makes you think a property development company gets BPR?

The transfer in to a trust will be a C.L.T so lifetime IHT will be payable.

Any rental income in the trust will be taxed at 45% (if a DT). If the trust held the shares, any dividends will be taxed at 38.1% in the trust.

Back to the drawing board unfortunately.

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to Adam12345
24th May 2018 14:10

Having reread S162 I agree that rollover relief wouldnt be available so incorporation only has advantage of being able to claim full interest relief, and lower tax rates.

Holdover relief would be available if he transfers let property into trust as an immediate charge to lifetime IHT would be due. So no cgt on transfer into trust, but significant IHT during lifetime. Property is however removed from estate after 7 years.
Take your point re rollover relief and trust income tax rates.

So conclusion seems to be consider transferring into trust, holdover gain but suffer 20% immediate iht on amount above joint NRBs (would have to have funds available to pay this).
Trustees then pay 45% on rents but interest relief continues to be restricted. Weigh this up against the alternative of 40% iht if left in estate and individuals having to pay 40% income tax.

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to Adam12345
24th May 2018 14:45

Quote:

What makes you think a property development company gets BPR?

Well, I know that Robert Maas thinks it does, and I'd feel fairly encouraged by that.

Making and holding investments doesn't and neither does "dealing" in land. Developing is neither of those things though.

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to Portia Nina Levin
07th Jun 2018 13:32

That's a trite point (see link below - you don't need RM to tell you that) and I was about to say the same, but I assume he must have meant development for rental rather than sale (since development for sale is clearly no different to any house builder trading as such).

https://www.enterprisetax.co.uk/inheritance-tax-and-property-based-busin...

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24th May 2018 16:35

Who is funding the SDLT?

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to Montrose
29th May 2018 10:20

Not too worried re SDLT. If the partnership transfers the property to a company where husband and wife are the only shareholders then Sch 15 FA2003 applies and stamp duty rate is wiped out.

Assume no SDLT if property transferred into trust?

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to alisonis
29th May 2018 13:52

What's happening to the

alisonis wrote:

substantial borrowing against the properties


? I ask that in response to your lack of worry re SDLT, but I've also been wondering whether you are concerned about deductibility of the debt(s) for IHT, since that seems to be one of the key drivers.
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