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  • Tax

    LLP/BICT - feeling wobbly about tax structure



    We spoke with a tax/company setup advisor recently and the below is an excerpt from his letter to us. The question is, does anyone on here use another company for this and if so, how much are you charged for similar work? We have been quoted, what we believe to be quite a lot.
    Kind regards
    Marie
    Tax Planning – Property Business
    It was a pleasure to meet you both recently to discuss your property business; I trust you
    have found discussions useful.
    I am writing to summarise what we have discussed with regards to your property business’
    tax position.
    Background
    Your property business consists of a portfolio of 11 rental properties that are held
    personally.
    The portfolio has a combined value in the region of £*** with debt of approximately
    £***
    Your husband currently owns all of the properties solely, apart from one property that is jointly
    owned with you.
    The properties generate gross rental income of approximately £TBA per annum and a net
    profit of approximately £TBA per annum.
    It will be necessary to obtain a detailed schedule of your assets when you instruct us, as well
    as a professional valuation for each property.
    You also own your main residence valued at £***k (£***k owed), which we have not considered in
    our proposal.
    You have indicated that you will be setting up a Limited Company to make purchases of
    additional properties, given the recent tax changes for property finance.
    Objectives
    You are keen to establish a structure for your property business that fits with your current
    commercial objectives:
     To formally recognise the existing partnership
     To provide greater control over profit sharing
     To limit any exposure on your personal assets
    Proposal
    Our proposal, in brief, is that you initially transfer the personally held property business into
    Limited Liability Partnership (LLP). The LLP will enable the property business to allocate
    profits in a tax efficient manner.
    In the future you may wish to review the structure of the property business to ascertain
    whether it is achieving some of your desired objectives or if it is still commercially
    appropriate; we would be happy to assist you with that review.
    Partnership
    We understand that you are not registered as a partnership with HMRC. However, from our
    discussions it is clear that you do in fact operate as a partnership. As such it is entirely
    consistent with the current circumstances and therefore appropriate to restructure your
    current property business into that of a formal partnership between you.
    A partnership agreement should be entered into and the partnership registered with HMRC.
    The form of the partnership could either be a general partnership or a Limited Liability
    Partnership, although the latter provides for a more commercial enterprise.
    You have considered the basis for the partnership and you believe that there is a commercial
    rationale for doing so.
    The creation of a partnership between you both should have no adverse tax consequences
    due to the various exemptions that are available.
    Summary
    So, as outlined in this letter we believe that you should consider transferring the investment
    properties that you currently hold in your own names to a limited liability partnership.
    Fees
    Our fees and engagement with you will be as follows:
    Limited Liability Partnership – tax advice in relation to the set up and transfer of the
    existing property business
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    Hi Marie,

    Is it £17K by any chance?  I would recommend that you contact your lender and ask if they approve of a structure of this nature.

    This video may shed some light:


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    Hi

    For some reason I could only see your  post up the fees will be....

    I was thinking of something similar. My accounts wanted to charge me £3k just for setting up the partnership even before the cost of transferring properties. There's one company that charge £400 up front consultation and then £250 per property.

    Did they say if CGT, stamp duty or remortgageing would be required?

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    It's all quite complicated but I think he said that there would be a little CGT but that it is within the allowable (or something) so we wouldn't actually physically pay anything and that if we can prove we've been a partnership for 3 years there wouldn't be and stamp duty to pay.

    I think he said that you don't necessarily have to transfer the mortgages to the LLP and that they could be held in "Deed of Trust"?

    Marie

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    A beneficial interest company trust then.

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    Debbie Franklin

    Director of Tax Peplows Limited

    CTA ACA FCCA

    I have no idea, sorry. we're new to all this.


    Marie

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    Hi Debbie

    I currently have 4 properties in joint names with my wife. Would this be suitable for me, if so what would the costs be?

    Two of the mortgages are with "Northern Rock" on cheap base rate trackers. If I were to ask for any permission or modifications they would push me to remortgage with another provider at much less favourable terms.

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    We don't get involved in Beneficial Interest Company Trusts. Sorry

    Debbie

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    Debbie Franklin

    Director of Tax Peplows Limited

    CTA ACA FCCA

    Hi Debbie,

    Do you mind me asking why you don't get involved in BICTs? Smile

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    Don't mind at all, in my humble opinion they don't work and are fraught with issues when you need to refinance. We decided not to get involved with them or the hybrid structure.

    Deb

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    Debbie Franklin

    Director of Tax Peplows Limited

    CTA ACA FCCA

    Thanks for clarification Debbie.

    I just found this article from the Telegraph:

    Popular buy-to-let tax loophole 'won't work', accountants warn

    Experts warn that landlords (using BICTs) could fall foul of tax avoidance laws as well as leaving themselves open to allegations of "mortgage fraud".

    Nimesh Shah, of accountant Blick Rothenberg, warned of "huge pitfalls".

    He said the main issue from a tax perspective is a section of the Income Tax Act which prevents individuals from transferring an income stream into a company for tax reasons.

    Mr Shah said HMRC would be looking for any sign that this was an artificial structure or tax-motivated manoeuvre.

    He said: "The test is to do with why you're incorporating. Is there a commercial rationale, or is it a tax reason?

    "In a normal incorporation situation everything is going in to the company. Here you're splitting the income and the ownership out, which makes it more of an issue," he said.

    Jeremy Raj, of law firm Wedlake Bell, said: "If you're not careful you are leaving yourself open to being accused of committing mortgage fraud. If there's any major change in the ownership of a company then the lender is entitled to know."

    On a separate issue, Mr Shah also said that property owners need to be careful with the section of the stamp duty law which apparently allows a partnership to avoid stamp duty on incorporation.

    There is no set test, but the Revenue can remove the relief if it believes that the partnership has been established specifically for the purposes of avoiding the stamp duty charge.

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