Landlords Personally owing property need to tread carefully when re-structuring into a LTD Company – The first step is the LLP.
(How to go from Sole Trader to LLP)
As already explained in my other blog (Property Incorporation Issues – S.24, CGT & SDLT) – there are a whole list of reasons why a property investor might wish to transfer their property portfolio into a Limited Company. The issue however is that of CGT and SDLT in making the transition.
Using an LLP as a stepping-stone from ‘sole trader’ to ‘LTD Company’ opens up 2 useful tax reliefs – if done properly.
When an LLP is formed, it is possible to use a trust which enables the ‘beneficial ownership’ of the property to be transferred into the LLP – The property itself is not actually being transferred – so there is no formal ‘disposal’ for either CGT or SDLT purposes. The other option is to actually move the property through individual stages instead of using this ‘beneficial ownership trust’ structure.
Setting up an LLP is similar to setting up a LTD Company – you can do this directly or use a formations agent (such as ‘companies made simple’ – Click here).
There are great guidance notes from the Government, as well as access to the forms you’ll need when/if doing this yourself – Click here.
As with all tax planning’ it is really important that the numbers stack up – and that things are being done for the right reasons. There is no point in paying for planning to avoid CGT (for example) if the properties are never going to be sold. This is because CGT on death is ZERO – so owning the property right through to death would make CGT planning a waste of resources.
The final route from sole trader into LTD company will depend upon:
1) Numbers of properties in the portfolio.
2) Equity in the properties.
3) Rental profit in the portfolio.
4) Levels of debt on each property (Size of mortgage).
5) Personal income tax position before and after incorporation.
6) Family and business position – Such as spouse, business colleagues, children etc.
7) Future plans for additional property investments.
Whilst everyone wants to end up with their property portfolio being exempt from UK taxes, if there are costs and taxes triggered (or at risk from being triggered) that mean ‘savings’ are slim or may not be made for decades… then there should be some logic applied to the whole planning process.
Obviously we offer a FREE consultation which will go through ALL the information and point you in the right direction when (or if) it comes time to make your move(s).
Landlords first need to look closely at the current ownership of the property and who else will be involved as a partner in the LLP. By that we mean:
If property is currently owned in SINGLE name, and the LLP is to be formed between a husband and wife, there are tax exemptions under the CGT rules that allow gifts to be made between husband and wife… enabling the property to become ‘jointly’ owned before moving into the LLP. However, where there are mortgages involved, the SDLT rules would raise a SDLT charge if the transfer from SINGLE ownership into ‘JOINT’ ownership resulted in mortgage value in excess of £40,000 being transferred between spouses.
When each individual transfers their share of the property into the LLP the ‘equity’ being added becomes the ‘partners’ capital account balance.
Profits from the LLP will be taxed as individual earnings for each partner in proportion to this initial ‘capital account balance’. So where the LLP is between a husband and wife in equal proportions (50% each) – the profits will be taxed upon each of them as self-employed income based on each receiving 50%.
The LLP can of course pay a salary to any individual (including the husband and wife) in order that they can be remunerated for specific work that they do. In this way, the overall LLP profit can be reduced (as the salary is a business expense for the LLP). The remaining profit will still be divided 50% each – but now there is less to go around.
With proper advice from an Accountant, the profits and salaries can be made as tax efficient as possible for all parties concerned.
It is important to note that additional planning can be put into place where the amount of mortgage is less than the original purchase price of the property. This is called ‘capital account planning’ and it can result in the final step of incorporation resulting in a large Director’s Loan account being created. This allows the Directors in the NEW Ltd Company being able to draw significant value from the company as repayment of this ‘loan account’ – which is not treated as ‘dividends’ or ‘salary’ and is therefore free from tax.
With all the complexities and options being driven not just by the tax rules, but also the individuals concerned, you can see why we suggest planning is carried out BEFORE buying your property portfolio!
However unless someone develops time travel – we are down to only 2 real options:
1) Take proper advice and work out a detailed plan as to what is being done and why.
2) Leave things alone and put planning in place to ensure future property purchases are within the right structure from the outset. This might take the form of buying NEW property in a LTD Company and forming an LLP between this new Ltd Company and the existing Sole Trader. Then trading as an LLP in this format before ‘passing’ all of the tests to allow HMRC to grant the CGT and SDLT reliefs.
We are very happy to offer an initial FREE consultation to find out the details – so that we know what can be done and why it might be beneficial from both as personal and a tax perspective.
Our access to property tax experts at all levels is unique as we can ensure you are properly advised on the whole process, not just the initial ones.Most Advisors, such as IFA’s and Accountants do not have the internal experts to assess a client’s FULL situation – and come up with the best overall strategy.
As I have worked in the pensions and tax planning field for over 30 years, I have personal access to experts in all taxes and can combine these experts into a unique service that really does go beyond what you’d get from your normal ‘Advisors’.
Every wealthy entrepreneur or property investor I have ever met had their own Accountant, Solicitor and Financial Advisor – yet in 90% of cases we were able to dramatically able to improve their overall exposure to UK taxes and access to their pension money.
What is vital is the proper implementation – with care at every stage.
This is why we offer a FREE consultation – as it lets us explore your current situation before jumping in with ‘solutions’.
If you are interested in seeing if your pension can be used to help support your business – then call us now, or send us your details and we will call you back.
We look forward to helping you soon.
Paul Stewart – Specialist Tax Advisor Links: