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  • Tax

    Incorporation - Investment Value - CGT

    It appears that I cannot claim s162 capital gains rollover relief on the incorporation of my portfolio due to the fact that I fail one of the the conditions of the relief  " ALL properties of the business must be transferred ".  I did not transfer all the properties in the portfolio, a few I left in my name.

    Therefore now I am facing a CGT bill from HMRC based on a massive "capital gain" when going off the "investment values".  But the investment values are high. None of my properties would achieve their respective investment values if they were put up for sale, I'd be lucky to achieve the purchase price I paid + conversion cost.

    So where do I go from here...

    Regards

    Arran.

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    Hi Arran,

    The answer is don't incorporate.  Get in touch if you'd like to know more.

    Transferring your property portfolio into a limited company simply to offset the S24 reduction in mortgage interest relief rules has many disadvantages which can be summarised thus: -

     

    ·        Liability to capital gains tax and stamp duty if you can’t prove your entitlement to S162 incorporation relief (you must be working 19-hours a week or more in the business or pull the wool over HMRC’s eyes via a temporary LLP).

    ·        Upfront remortgage costs such as early redemption charges, brokers fees, lenders fees, and legal fees.

    ·        Most lenders won’t lend to limited companies, and none are keen on so called ‘beneficial interest company trusts’ as they fundamentally weaken their ability to pursue the debt.

    ·        Significantly reduced choice of lenders and higher interest rates.

    ·        Lenders will mostly require a personal guarantee (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.

    ·        A limited company is fully visible to HMRC and subject to corporation tax, dividend tax, income tax, and national insurance.

    ·        It’s almost impossible to mitigate inheritance tax (40%) without expensive (at every stage) and ultimately uncertain ‘opinion-based’ trusts, meaning that your heirs may have to break up your hard work just to pay the tax bill.

     

     

     

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    Most of the points you make Tony aren't necessarily true for everyone and some are simply wrong

    you are right that incorporation isn't for everyone and that it isn't something to be undertaken lightly

    but it is the right thing for some people to do

    of that, there is no doubt

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    So why not have a property per company!?

    OK 30 properties 30 companies

    No big deal, maybe a slightly larger accountants bill

    Well worth it to prevent lenders interfering with other properties

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    Have you already done your incorporation?

    That - missing one of the most basic conditions to qualify for S162 - is a monumental clanger to drop

    Were you advised?

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    Has HMRC actually told you of the cgt liability, or someone else?

    Which would be cheaper, putting the remaining properties into the company, or paying the cgt bill?

    is the former still even possible? Would the transfers need to be done this a financial year?

    without labouring the point, yours is a perfect case of why professional, insured, specialist advice is recommended when considering such significant changes.

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    Hi Jonathan, whilst I'm happy to admit that if you don't need the income and couldn't care less about your heirs paying 40% of the net value in inheritance tax, than incorporating might be a solution, I'm absolutely correct on the points I mentioned and have the evidence to back it up.  Meanwhile, incorporating your portfolio will cost you far more than you'll ever save on S24, especially if the chancellor  introduces differential rates of corporation tax for property companies in the same way that Osborne did with CGT.

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    My own feeling Tony is there is a bigger chance of Hammond bring in Section24 B

    They have got away with S24 Now its a ripe apple to pick and irresistible inn my opinion

    Taxation of a Ltd Co will have a great number of Tory supports up in arms

    But in truth no one knows


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    Learn Change and Adapt ?????