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News July 22, 2021
     

Landlords How to Side-Step The Portfolio Incorporation Tax Traps

Mortgage Relief ends…………How to escape the CGT trap!

Since April 2016, when HMRC withdrew the ‘Wear & Tear’ allowance on rentals, the trap has been laid for BTL landlords who own their portfolio in their own name.

The net began to tighten in April 2017 as the amount of mortgage  that was allowed to be offset against Income Tax. The large increase in personal tax liability prompted many concerned landlords to research the benefits of the change ownership into a Limited Company wrapper.

However, the short-term barriers that HMRC have placed in the way to complicate this transition, for many, outweigh the future benefits.

Specifically; Capital Gains Tax and Stamp Duty (SDLT) on transfer or sale of any of these assets mean that a portfolio that’s been held and expanded over a number of years can be very heavily pregnant with gains and therefore tax liabilities in these areas.

What to do? Bite the bullet – transfer into a NewCo and hope you live long enough that the future savings will outweigh the immediate costs?

There is a case for this as the benefits are very attractive i.e. NewCo will only pay Corporation Tax of 19% on its’ profits; many more running expenses (including staff costs) can be offset ; earnings can be extracted as dividends at 25% tax.

A serious hurdle can arise when the portfolio is pregnant with Capital Gains, and not much liquidity – again, more costs if remortgage’s or bridging loans are needed.

This is not a new situation.

Owners of appreciating assets, particularly property, have wanted to protect them against IHT for decades; and there is an efficient and timely solution.

Statutory reliefs (i.e. no taxes) apply when an asset is owned by an LLP; where the LLP is dissolved and the ownership of the asset is transferred to a NewCo in return for shares in the NewCo.

The process can stop there – or continue with the transfer of ownership of the shares to a Trust. This lies outside the landlords estate and is therefore exempt from IHT.

Too good to be true?

Let me know what you think?

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