LANDLORD TRUSTS

If you have a property portfolio with 4 or more properties, did you know it’s possible to:

       

      Reduce the 40% Inheritance Tax rate to 0%? 

      Reduce the 28% Capital Gains Tax to 0%? 

      Reduce Stamp Duty to NIL?

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Aizlewood's Mill Nursery Street Sheffield S3 8GG

Our 3-stage approach

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Partnership (for the first year)

If the properties are not held jointly with someone else, a partnership must be formed and formalised. When transferring assets from a partnership to a limited company without triggering a charge to stamp duty, it is recommended to run the partnership for a year (as opposed to forming and liquidating within a few weeks which is an approach adopted by a number of advisers) before incorporating. The partnership can be with another individual or a Limited company where you are the sole director.

The partnerships are formalised, registered with HMRC, and a partnership deed drawn up. The accountant will produce partnership accounts at the end of year 1.

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Incorporation (for 2 years)

Incorporation relief for capital gains tax can be claimed if HMRC see your properties as a business. s165 TCGA 1992- Incorporating Relief says:

More than 4 properties (excluding the main residence and foreign property).

That the properties (however many there are) generate rental income of £25,000 gross p/a or more.

That the partnership spends 10 hours a week or more dealing with his portfolio.

That the partnership has an intention of purchasing/selling property in the near future or has recently bought/sold property in the past.

Upon demonstration of these factors, incorporation relief should be available, and no capital gains tax will be paid.


Is there a Mortgage on the Properties? We transfer the beneficial (equitable) interests in the properties into the company to avoid the issues with mortgage lenders.


When the NewCo issues shares, the company is deemed to have acquired the beneficial interests at today’s market value (in other words, the historic gains are wiped out). This is one reason why we would recommend setting up a NewCo (the other being that it may well be “clearer-cut”).

Once a NewCo is formed, a holding/trading company structure could be adopted if it was preferable for tax reasons.

The accountant will white space the incorporation (we cannot get statutory pre-approval any more, HMRC won’t allow it) and HMRC have 12 months to challenge the incorporation. Remember, everything is on our tax advisers’ professional indemnity insurance – if they think it can be done and they are putting their professional indemnity insurance on the line, that must be seen as a positive belief in the advice being provided. To be clear, both advisers are chartered tax advisers and have worked for three out of the “Big Four” for a number of years.

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Trust (thereafter)

After two years of running the company, the company sets up a Specialist trust in accordance with s86 of the Inheritance Tax Act 1984. Provided that the trust is set up for the benefit of the company’s employees and their families (together with other stringent conditions), it will benefit from special tax treatment (see below).

 

Some of the company’s shares (presumably from the NewCo or, if we have a holding/trading company structure the holding company) are transferred into the trust. The trust is controlled by trustees which will be the client and others of the client’s choosing.

The ”special” tax treatment is:


• No entry charge for inheritance tax;
• No periodic charge for inheritance tax;
• No exit charge for inheritance tax;
• Immediate inheritance tax relief (NOT the usual 7-year period).

Overview

Summary

In short, it is possible for the client’s portfolio to be free of inheritance tax in 3 years – without triggering any charges to stamp duty or capital gains tax or without having to remortgage. Furthermore, mortgage interest relief can be claimed against corporation tax. The process takes 3 years.

Cost

Costs will be confirmed in the free-of-charge feasibility report as an accurate figure cannot be given without a full appraisal of an individual’s circumstances.