Set up a meeting with a potential client (sole trader) who has a building firm and also has some rental properties who wants me to do his accounts and SATR for last year, no problems with that from the brief conversation we had.
However he has asked about setting up a Ltd Company and moving the properties into that or maybe even setting up a trust, I did explain that this is more than likely beyond my expertise and he would be better off seeking advice from someone with more specific experience in these matters, but as always when I am asked it does make me look at the question in a bit more detail.
If he was to set up a Company and move the properties am I right in thinking that this would give rise to CGT and SDLT as well as having to change the mortgages into the Ltd Co unless it could be proved that it was in fact a 'business' in which case incorporation relief could be claimed under TCGA s.162.
Just wondered if anyone else had had any dealings with this
Cheers
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
If he was to set up a Company and move the properties am I right in thinking that this would give rise to CGT and SDLT as well as having to change the mortgages into the Ltd Co unless it could be proved that it was in fact a 'business' in which case incorporation relief could be claimed under TCGA s.162.
Hi Doug
A popular question from a lot of landlords recently and I am of the same opinion as you above. However, this client would need to tick the right boxes for s.162 to apply, such as hours worked on the portfolio etc. I've heard that it is easier to use s.162 if a partnership was in place (filing SA800's) and some landlords are doing this to then incorporate at a later date. Your potential client could have a dig around on the Property118 website as they have been big campaigners against the recent mortgage interest restriction for BTL and ways of mitigating this such as incorporating and I believe there is professional legal advice for a reasonable fee.
A partnership can escape the SDLT if itās genuine. Else, from the top of my head, FA 2003 s73/4 or 5a kicks in.
The only real benefit is if it was a partnership.
I guess it would depend upon the purpose.
For me Iād have the building trade and the rental business as limited companies - purely for the limited liability aspect (high valued assets safe from accumulated creditors)
Is rental a business or an investment activity- thatās a potential HMRC argument.
CGT, potentially 28%.
If itās a business then there is incorporation relief.
Trusts - whoād be the beneficiaries? There is gift relief, but there is a āsettlor-interestedā provision in legislation, for anti-avoidance
And with properties, never, ever forget about the potential VAT issue, if applicable- options to tax! Most likely not relevant in this case, but always, always check!!!
As said I will only be quoting for last years accounts and will be advising him to seek further advice from someone who has the relevant skills and expertise in these matters, I would not feel confident in giving any advice on a subject that I am not experienced in where any mistake by me could prove costly not only for the client but also to myself (Plus the work would probably not be covered by my PII).
It was just a subject that was raised which piqued my interest, thankyou both for your input and suggestions.
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
Morning Doug Good on you for passing up on this one and sticking to the ethics boundaries. I know John is another one who does this but it seems from some of the Qs posed on here that others completely ignore such matters.
Interesting one though and one Ive had a few conversations and frankly debates about such a couple of years back with an acquaintance of mine who is a financial advisor, about tax impacts and other costs/issues in various scenarios, ahead of impending changes.
On the face of it your potential client would fail the test on this one. You say he has a ''building firm and also has some rental properties'' so it appears his trade is as a builder and he has some properties on the side, indicating they are a side line therefore investment. As Mike explains the hours worked on a porfolio is just one of the things HMRC would look at.
Other considerations also need to be considered before making such decisions, and as ever a lot of the folk who mention such ideas havent considered the other aspects of incorporating. Hassle factor (and time therefore income lost sorting such out); re-financing costs not least possible higher commercial interest rates; re-valuations and their cost; cash requried to meet commercial LTV; solicitors fees for the transfers; restrictive covenants in any lending scenarios. Actually passing the 'partnership' test as opposed to the other half having an interest in the property. Lots more, but these are just to give some flavour.
It may well be better to leave the existing properties where they are and incorporate for any new acquisitions or as Mike also says establish a partnership and run that for a couple of years to try to minimise any challenge from HMRC, but this would need to run as a proper partnership rather a mere joing ownership of the property. Profit motive, full involvement of both partners, partnership agreement in place, other proof its a real business.
I have just located this for you for you for some extended reading if you want it, including round the commerciality challenges https://www.accaglobal.com/uk/en/technical-activities/technical-resources-search/2017/march/pitfalls-incorporating-letting-business.html
Duane Have I missed something? Isnt the finance act that you mention essentially relating to Sharia Law? Is this still fully in play, or been at least in part superceeded? Ive not looked at it, lazy and busy (!) , so wondering what ineraction it plays with Doug's Q!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Hi,
The reference to FA 2003 s75a, was in regards to SDLT / Partnerships and anti - avoidance.
As we know, genuine partnerships can escape the SDLT charge.
I agree that itās a tricky subject; an interesting one all the same.
A case where most of the taxes can / do come into play.
Apologies for the confusion.
