How to Avoid the Pitfalls of CGT Rollover Relief (s162 TCGA 1992) and SDLT Relief (Part 3 Schedule 15 FA 2003).

UK Landlords have been hit with many increases in the taxes they will have to pay. S.24 is one of the main issues – which reduces the tax relief available to Landlords with mortgages. 

In simple terms, S.24 reduces the tax relief available to landlords with mortgages down to the basic rate of tax. Indeed, in many cases this small change in tax regulations will result in a high rate tax payer making a LOSS on a property investment.

Accountants and Advisors looked at this change and sprang into action. Their advice is simple:

If a Landlord carries on their business as a LIMITED COMPANY – the company will be allowed to deduct the full amount of their mortgage costs from their income – which in turn reduces the taxes paid on a property investment.

Word then spread – if you want to avoid S.24 and the reduction in tax relief – then you NEED to switch your investments over to being in a LIMITED COMPANY. There are a LOT of articles on this subject.

There are 2 ways forwards:

1) Transfer the BENEFICIAL ownership of the property into a LTD Company – allowing legal title and mortgages to remain with the sole trader. The Limited Company would then be responsible for paying tax and claiming relief on mortgage costs – and S.24 as an issue vanishes. This is a half-way house that solves ONLY the S.24 issue.

2) Transfer the Legal ownership into the LTD Company – with all the steps and issues for CGT and SDLT.

This Blog will look at 2 of the main issues – CGT and SDLT that are linked to moving your investments into a LTD Company.

Then at the end – we’ll tell you how to side-step S.24 AND all the CGT and SDLT issues in full. There is an old phrase that fits here: Prevention is better than a cure!

CGT ROLLOVER RELIEF (s162 TCGA 1992):

 The first issue facing landlords when they decide to switch from personal ownership into trading as a limited company is that of capital gains tax (CGT). Technically they are disposing of their property and will be triggering a taxable disposal. 

However, there is a relief available – called “Roll-Over Relief”. This relief is available as long as certain conditions are met:

1) The transfer of the property needs to be FROM a business TO a business. In simple terms the lettings activity cannot be passive and seen as being an ‘investment’. There have been many cases involving HMRC and the Courts, and HMRC will not hand out clear written guidance on this one. In order for an activity to be defined as a ‘business’ the Landlord needs to be working on the business for quite some time each week. Simply owning 2 residential properties and receiving the rent does not make this activity a ‘business’. Care needs to be taken when looking to claim “Roll-Over” relief.

2) The new property company should be issuing shares in exchange for the property that is being passed into its ownership. Where the ‘consideration’ is made up of something else – the roll-over relief is limited proportionately. This is an issue when mortgages are taken into account, so again care needs to be taken when assuming that full Roll-Over relief is going to be granted.

3) The business must be sold as a ‘going concern’ – which in most cases will be ok.

In Elizabeth Moyne Ramsey v HMRC [2013] UKUT 266 TC the Upper Tier Tax Tribunal ruled that residential property letting is a business for the purposes of roll-over relief under s162 TCGA 1992 (incorporation relief).

HMRC’s own interpretation of the judgment at CG65715, however, does impose a minimum threshold of 20 hours per week, as per the particulars of the Ramsey case:

‘You should accept that incorporation relief will be available where an individual spends 20 hours or more a week personally undertaking the sort of activities that are indicative of a business. Other cases should be considered carefully.’

This Roll-Over relief will apply until the company is sold, and then the original gain will come back to be taxed.

The next issue for incorporation is Stamp Duty Land Tax (SDLT).

As the property ownership will be passing from one type of ownership (Personal) to another (Company) – there has been a transfer which should trigger SDLT to be paid.

SDLT arises on the market value of the properties transferred (s53, FA 2003), irrespective of amount of cash actually paid. Simply issuing shares in exchange for the property does NOT mean that the SDLT will be calculated on a zero value.

But as with CGT – there are exemptions available:

Companies incorporated from a partnership may significantly reduce or eradicate the SDLT liability altogether.

There is an SLDT exemption in transactions between a partnership and persons connected with the partnership (Part 3 Schedule 15 FA 2003).

Applying CTA 2010, s1122, an individual who is a partner in a partnership, and a company controlled by that same individual, are defined as “connected parties”  – and given the SDLT relief.

This relief has resulted in many articles and comments being made telling Landlords to trade as an LLP for a number of years before taking the final step and incorporating. All of this adds years to the time-line and of course adds considerable costs to the process.

Another issue that many Landlords fail to consider is that of the relationship between the people involved. If the “Partnership” was made up of people who were unrelated (i.e friends but not relatives) – the shares in the property company will end up being owned by the same people, who in technical terms will be ‘unrelated’.

The SDLT relief only applies to the value derived from ‘related’ individuals – meaning a reduction in the SDLT relief. Sometimes to zero (meaning full SDLT is payable).

In other planning, the SDLT payable is calculated based on the ‘consideration’ – which in the case of property will be the size of any outstanding mortgage that is being moved at the same time.

Moving a £2m value property with a £1m mortgage will attract a SDLT calculation based on £1m instead of £2m.   

So there are 2 main reliefs and 2 main issues for Landlords to consider!

When it comes to proper property tax planning, the answer lies in putting planning in place BEFORE either of these issues arise.

If you have cash and want to invest into UK Property – the most important thing is to move this cash into the right structure FIRST. Only once the cash has been placed, should you then move onto raising money by way of a mortgage.

Here’s an example (Note: this example is not “Advice” and the “QNUPS” route is only 1 of many available depending upon the tax-residency of the investor). 

A property investor wants to invest £1m into UK property and is looking for the best way to reduce their exposure to UK taxes. They know that they will be raising a mortgage of £2.5m and buying a property for £3.5m. They do not want to pay UK taxes on the rental income and when they sell the property they want to make sure that the new CGT payments (30 days after the sale) also don’t apply.

They would need to contribute their £1m as a cash consideration to a QNUPS (Qualifying Non-UK Pension Scheme). The QNUPS would then invest the £1m into units of a special tax exempt unit trust (ask for more information!).

Only once the £1m has reached the Unit trust should the landlord raise the mortgage money, and invest the full £3.5m into the property.

How you have a tax exempt property investment. Nothing has been disposed of so there is no CGT to worry about, and no mortgage has moved so there is no SDLT other than the original purchase SDLT.

Once within the Unit Trust, all the profits earned will be exempt from UK income and corporation tax. Any property sale will also be exempt from CGT. On death there will be no IHT either.

A great example where…”Prevention is better than a cure!”.

Landlords will no longer need to worry about S.24 – or any of the issues that apply to CGT Rollover Relief (s162 TCGA 1992) or SDLT Relief (Part 3 Schedule 15 FA 2003).

For Landlord with property owned in sole/joint name where they would not ‘pass’ the incorporation tests and qualify for the CGT and SDLT concessions, they could simply set up a Ltd Company for their ‘NEW’ property investments and link that up with their self-employed property business as a NEW LLP. Trading like this for a number of years will allow them to add to their property portfolio (in the LTD Co) and reach the size and scale of operation that would ‘pass’ the incorporation relief tests – letting them move onwards to look at all kinds of other planning.

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.