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  • Tax

    Gifting BTL shares to children

    Dear all, I am thinking of transferring 4 btl properties into a limited company & had the following questions if anyone can kindly oblige:

    1. Do these all have to be done together?

    2. My kids are aged 17 & 18 and I am thinking of giving them shares in the company and was wondering if this would help with CGT/IHT/Income tax?

    3. Can kids use their personal allowance through a limited co? or is this done when they take dividends?

    4. Is it best to allocate shares at the outset or can we gift as and when?

    5. Should we otherwise set up a limited co just for the kids, with say one/two properties? not sure if we could get waiver of cgt in this scenario?

    6. Re. cgt, I understand it can be waived if this is our only business - if so, will the cgt be deferred at our original purchase price or is it taken from the point & value of the transfer to the ltd co?

    7. Not sure if stamp duty is payable ?

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    You really need a property tax adviser to answer all your questions professionally. I have just registered a limited company so seeked tax advise before I started. Was advised that I should have my 2 girls as B Shareholders from the outset as it is more complicated from the inheritance tax and share valuation point of view if they are added later. I did not follow their advice though as my mortgage adviser advised against that arrangement at this stage as mortgage options would significantly reduce. So when I get to your stage in a few years, I am unsure what I would do really. I wanted to set up the company and allow it to grow in the first 5-7 years.

    I am aware that you would need to purchase the properties through your limited company again  - so SDLT would be payable.

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    Some lenders will accept more than the usual max 4 shareholders if they minors.    .B shares can be issued at anytime and the new shareholders will enjoy any gain in the property value from the point of the share issue..Be aware though the costs of issuing  the new shares can be pretty high

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    I think you have in mind S162 incorporation relief.From your description i doubt very much you will be able to take that route.

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    Of course you need tax advice and I am not a tax advisor (disclaimer).

    But I am in a similar position and can pass on my understanding of IHT planning:

    A BTL business (called an "investment" business) will not attract Business Property Relief, so your gifts will be viewed as Potentially Exempt Transfers - there will be no IHT liability after 7 years (with some taper relief earlier). With this in mind the sooner you make the gift the better.

    SDLT will be payable.

    Tax on withdrawing monies from the company is complicated and you will want to get proper advice. Problematic is that you will pay corporation tax on profits, and then income tax or tax on dividends  = double taxation.

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    The transaction that you are considering has a number of consequences and so the answers cannot be provided without knowing full details of your portfolio, your requirements for income after the transaction, your other income, what sort of finance you have in place, etc. So seek professional advice.

    However, in summary the tax reliefs from CGT only apply to businesses, so your property portfolio would need to constitute a business. In addition stamp duty would be payable on the transfer of the properties, although multiple dwellings relief may apply.

    If you have mortgages on the properties then these would probably need to be repaid and thus incurring new arrangement fees and possible less favourable terms from a corporate mortgage.

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    Thanks all for your input. As always with these scenarios, multiple questions pop in and out of your head. I will seek professional advice, however, as you may be aware, this often varies from advisor to advisor. 

    Peter, I am wary of the double taxation element, however, as we will both be in higher tax brackets, feel this would still be lower via company structure? that is unless the govt changes the laws around this and presuming they will be retrospective.

    Even if we sell, then we will pay a lower rate of cgt. though not sure if we can all use our cgt allowances here?

    What would be best way to utilise 2 children's personal allowances (for university costs) & can this be effective through a ltd co via dividends or otherwise?

    Not sure if all properties have to be transferred in together?

    If we cannot obtain mortgages easily, we could lend the ltd co the money?

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    sks, My conclusion was a company is tax efficient if you plan to grow the company, ie retain all profits), but to withdraw monies the best you can do is break even by paying out in the form of dividends. Your plans are  more complicated than mine and it seems you need good advice and some clear thinking.

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    The limited company route is most definitely not the way to go (see below).


    The transactional costs


    The value of your time to one side, moving from being a private landlord to a corporate one will incur you in the following costs: -


    • CGT and SDLT if you don’t qualify for S162 Incorporation Relief (you won’t know until it’s too late)
    • Early redemption charges
    • Brokers fees
    • Lenders fees
    • Legal fees
    • Loss cannot be carried forward


    Whilst not in themselves direct transactional costs, being a commercial borrower impacts you in the following ways: -


    • Significantly reduced choice of lenders and higher interest rates; the majority won’t lend to limited companies, and none are keen on BICTs as they fundamentally weaken their ability to pursue the debt.
    • Lenders will mostly require full personal guarantees on a joint & several basis from all the directors and shareholders (if the company goes bust you remain responsible for the debt).
    • Lenders will take a debenture (legal charge) over the company’s balance sheet, which restricts your ability to make best use of your director’s loan account if at all.
    • You’re tied in to the first lender and their appetite for further lending, if any, meaning that each new acquisition or remortgage may need a new lender and a new company if your existing lender isn’t interested.
    • If property prices fall thereby increasing the loan to value beyond the point to which the lender originally agreed, you’ll have to find the cash difference
    • Restrictions on what you can borrow for i.e. remortgage to fund lifestyle.


    The tax position


    Limited Companies and the individuals within them are taxed up to seven different ways: -


    • Corporation Tax (19% falling to 17%, but could be uplifted for ‘property/investment’ companies, as CGT was for individuals)
    • Capital Gains Tax on personal withdraws of capital resulting from selling assets (10%, 18%, 28%)
    • Directors Loan Account Tax (32.5%)
    • Dividend Tax (7.5%, 32.5%, and 38.1%)
    • Income Tax (20%, 40%, 45%, and 60% on the slice between £100,000 and £123,000)
    • Employees and Employers NIC (12% and 13.8% respectively)
    • Inheritance Tax (40% - ‘investment’ companies, i.e. those that hold residential property for 12-months or more for the sole purpose of collecting rents, are fully subject to IHT)
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    Thanks Tony, very useful indeed.

    Do you think it would be better then to simply gift a % of the property to children, increasing over time and allocating some rental income to them?

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