I recently met an estate agent in Bayswater, who I have known for well over a decade. He has an issue which I suspect many readers have as well. During the course of his business he has built up a small but respectable portfolio of 5 properties; the issue is they are all in his personal name.
The thorn in his behind is that being a high rate tax payer he cannot offset the mortgage payment from the rental income. He cannot offset an expense from an income.
This is the equivalent of having to pay taxes on your turnover and not your actual income.
Back when he bought the properties, the lending was more favourable and there was no real tax advantage to purchasing the property in a corporate vehicle; both from a loan to value perspective and that you were able to get a far keener rate. The LTV went up to 89%, if memory serves me correctly, you could also add a gifted deposit. This meant 94% of the purchase price would be coming from the lender; this particular lender was called GMAC. Therefore, most purchasers in this era bought personally.
The only way this interest can be off set is if the property is in a corporate wrapper, where the property is now held in a company and the shares are now owned by the investor.
In order to make this happen, there are going to be two issues, one is the capital gains tax payable, and the other is the stamp duty on the company purchasing the property.
The properties would have been bought at a fraction of their current value, therefore the tax on this gain would be substantial. Not to mention the renewed finance costs on the company instead of the personal name.
For these reasons, most people in this position simply bear the slow pain.
However, there is a way out of this predicament. I know a barrister who specialises in these matters, and has already dealt with numerous cases successfully.
As always, the devil is in the detail, and a few conditions need to be satisfied in order for this to happen.
One consideration is the time spent per week on managing the portfolio. Case law has shown that property letting may consist of sufficient let properties and engagement by the owner to constitute a business.
The Ramsay case is the case law which has been cited. In that case, some 20 hours per week were spent on managing the portfolio. The court decided that the level of activity, and taking the activities of the taxpayer “in the round”, was sufficient to deem her work in respect of the portfolio as being beyond the mere passive receipt of income and therefore satisfied the “business” test for the CGT relief.
If the portfolio is a business, it should be possible to transfer the entire business to a company in exchange for shares in that company, without triggering capital gains tax. Instead, the shares that you receive in the company will have a reduced base cost for tax purposes, meaning that capital gains tax may instead be due on any future disposal of those shares. However, the company is deemed to have acquired the properties at their value at the date of incorporation, meaning the company will be taxable on any future growth in the value of the properties, but not the growth prior to incorporation. You will have transferred the properties into a corporate vehicle without incurring any capital gains tax at that time, or stamp duty.
An initial meeting will be set up for this chap, to assess whether the shoe fits his particular situation; it will be an interesting exercise.