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Investment property into limited Co

Can it be free of tax and stamp duty ?

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My client has been advised by a property management company 

"If you form a limited company  AND THAT WILL BE YOUR ONLY INTEREST AND SOURCE OF INCOME,  the law will consider you transferring your property into that company without the payment of capital gains or stamp duty.
However should you sell the property you would be liable to pay Capital gains and stamp duty."

My client  has established a NewCo and one of the individuals (a husband & Wife) has an investment property personally ( they work earning about £40k and get 10k of rent from the property) which is what they intend to transfer to the limited company.

my understanding is that the transaction would crystalise a capital gain and be liable to stamp duty. I dug deeper and the only legislation that i think the property agent can be considering making such a comment is rollover relief (incorporation) under s162 TCGA. an article in taxation says 

Incorporation relief

This relief applies on the transfer of a business to a company where the transfer meets the conditions set out in TCGA 1992, s 162. It is automatic and no claim is required, but since 2002 the transferor has been able to make an election under s 162A for the relief not to apply.

HMRC provide general guidance on incorporation relief in their Capital Gains Manual at CG65700 onwards.

The conditions for s 162 relief are met if:

a person who is not a company transfers to a company a business as a going concern, together with the whole assets (the “old assets”) of the business, or together with the whole of those assets other than cash; and

the business is so transferred wholly or partly in exchange for shares (the “new assets”) issued by the company to the transferor.

Guidance on the meaning of “business” is provided at CG65715, where HMRC note that the term goes wider than “trade”.

However, at the time of writing there is no reference in the manual to the Upper Tribunal’s decision in Ramsay v HMRC [2013] UKUT 0226.

Reversing the decision of the First-tier Tribunal, the Upper Tribunal held that the letting of flats in a single large building was sufficient in nature and extent to amount to a business for the purpose of incorporation relief. The degree of activity outweighed what might normally be expected to be carried out by a mere passive investor.

A “company” includes a body corporate or unincorporated association but does not include a partnership (see s 288).

Link : https://www.taxation.co.uk/Articles/2014/09/02/330231/changing-horses

Q. has anybody any comments to add to enlighten me - do you think the agent is talking about the above relief or something else ?

Q. reading the ramsay case and https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65715 , I am not sure the client commits enough hours to the property for it to be a trade. does anybody have an opinion on this.

Thank you

 

Replies (10)

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Hallerud at Easter
By DJKL
13th Mar 2018 12:13

They are talking about the above (imho) but not sure they have grasped the difficulties of arguing it is a business with just one property earning £10,000 a year (possibly with just one tenant)

I know first hand what a property business is, we have over 100 tennacies (These days virtually all commercial property), common charges, apportioning, rebilling of utilities etc, imho letting one flat is going to be tricky to argue as a business.

However as the property management company are offering tax advice to your client maybe suggest to your client that he/she gets an engagement letter from them re same, gets the advice in writing, gets insurance re HMRC enquiry, checks they have the resources to meet your client's claim when things go pear shape and then follow the agent's advice-if it works fine, property in company,if not they have someone to sue re their costs and a rebased asset within the company

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By Akrigg
13th Mar 2018 12:37

Yes - they're talking about the opening up of s162 relief for property businesses following on from the Ramsay case. But also, yes, for the property letting to be a business it needs to be substantial and the owners will need to be a devoting a good amount of time to running the property business. From what you've said, I doubt that your clients would qualify.

On the SDLT side, transfers from individuals to a connected company are likely to be liable to an SDLT charge. Transfers from a partnership would fare better.

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Portia profile image
By Portia Nina Levin
13th Mar 2018 12:41

What happens to the rental profit? Do they spend it all? If so, they don't want to put it in a limited company, in any event.

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Replying to Portia Nina Levin:
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By floggy
13th Mar 2018 14:31

This is just one property
The plan is to buy 5 more. with mortgages.
Both directors will have pensions too, one above PA the other probably of about PA.

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Replying to floggy:
Hallerud at Easter
By DJKL
13th Mar 2018 14:54

And getting loans for the company to acquire the other five properties will be simple?

Cashflows all looking sound given LTV levels inherent?

If all six properties are of equal value at outset, and one is owned and 5 acquired fully by loans (unless more equity is being inserted) then that is an initial LTV of 83%, pretty steep to convince a lender to lend without strong personal guarantees.

Also if basic rate taxpayers why is a company shell a good idea/needed?

If banks want loans amortised at say 83% LTV either yields are through roof (poor quality properties) or loan term is very very long.

Now I appreciate I know Edinburgh market not your client's market, with say gross yields at 5%, but has your client actually done some cashflows to see how this company can borrow at say 83% LTV, meet all operating costs, pay interest on the loans, pay CT on profits and amortise the loans over say 15- 20-25 years out of post tax profits?

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Replying to DJKL:
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By floggy
13th Mar 2018 15:24

neither will be basic rate taxpayers and they have substantial private means.

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Replying to floggy:
Hallerud at Easter
By DJKL
13th Mar 2018 16:01

But they will be in retirement (per your post) so how long until retirement, it is obviously relevant as you mentioned it.

If they have substantial private means why bother borrowing?

Has anyone done any projections/cashflows re this venture?

I am afraid having done (in my day job) the BTL stuff on a pretty big scale £8 million properties, > £400,000 rents, I have experienced all the costs/extras etc that eat into perceived margins, in my experience (not us as we never went OTT re leverage) BTL and high leverage (unless massive liquidity elsewhere in which case why go for high leverage) is a recipe for disaster.

Work the cashflows, leave some headroom and see what LTV the business can really support would be my advice. Consider additional borrowing costs and extra arrangement fees, the fewer lenders available etc if a corporate shell is used to borrow; these all mount up.

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By Adam12345
13th Mar 2018 13:18

Well it is not a business so you are very brave going down the s162 route.

If they do go for s162 they are not going to have a very big director's loan account... Instead they will have a large amount of share capital/premium so it may be worth forgetting about s162 altogether anyway.

The government are coming for BTL landlords. They know a fair proportion of landlords are incorporating their BTL 'business' so it is only a matter of time some other legislation comes in to increase the tax on enveloped properties, it would be quite easy for them to suddenly remove the ATED relief for BTL's which would be very painful for some.

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Replying to Adam12345:
Hallerud at Easter
By DJKL
13th Mar 2018 14:24

Agreed, up here (no idea re down south) we already have changes to lease tenures, landlord registration, landlord responsibility re unruly tenants, a veritable never ending creep of red tape.

On top of this you have relaxed planning rules re build to rent schemes and a not that subtle message that big institutional landlords are good small private landlords are bad.

A fair few up here are pretty much already out of residential letting (we have one flat left out of sixty one we built), the writing being on the wall re the sector- which is a bit of a shame as we were building to rent in the 1990s-ahead of the times.

The next inroads into property regulation that will likely have a large impact is minimum energy performance re possibly older commercial properties, whilst currently we have to obtain an EPC to market these I can see ahead the spectre of a minimum energy performance being required, what that will mean is a lot of inner city commercial property disappearing (so more people travelling further to get to work) and I also expect far higher standards to be brought in re let residential property, not just HMOs but possibly all residential properties being let.

I also expect a massive clampdown on FHL properties without planning/ building warrants for same in places like Edinburgh where they are endemic.

The freezing of indexation re companies maybe should act as a clue to the future direction of travel.

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By pauljohnston
19th Mar 2018 10:35

We can all guess what is going to happen next but not much help to the poster.

SDLT via a partnership although what is the property value?

If there is borrowing already how is it proposed that this be deal with.

I would have though a better route would be to leave this as being owned by the couple and the new properties being bought in the company. The new loans will probally need a legal charge on the directors other assets as it has no history.

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