Sell existing rental properties to Ltd with large(ish) warchest - opinion please...

[ChimpMaster]

I've been thinking about this for so long (years) that it's fried my brain.

My objective is a little different to yours: I probably won't work in IT any more (certainly not worth contracting with all the stress of HMRC) and am looking to exit into full-time property management/development.

Ultimately - in my view - the cleanest solution is to MVL (and it has to be a genuine exit from your business) and then loan the proceeds into the SPV. Then you can enjoy the repayment of the loan from the SPV for many years to come. Note that after the MVL, you don't need to loan all of the funds into the SPV; you can get a Ltd Co mortgage, which is more expensive than a personal BTL mortgage, but gives you some options.

The other option is to retain your Ltd Co and just change the SIC code to a Property investment/rental business. I've researched this and queried the experts and it appears to be a sound option. It means you don't get any personal lump sum out but again you can leave the rental income to accumulate and to buy more investments, or take out as dividends.

The other options are inter-company loans or set up a holding company. Each has their own pros and cons.

In my view - and I speak not as an experts, but as someone who has researched for himself - I think MVL with ER would be best for you because you are quitting the IT business and getting a HRT paying job. So pay your 10% CGT and then invest the proceeds into a SPV, from which the output will be tax free until the loan is repaid.

The only risk is if HMRC deny you ER - in which case I don't know : are you forced into paying 28% CGT or can you rollback the MVL application and rethink a strategy (Maslins is this something you can answer?)

But finally, don't plan any strategy 10 years in the future. HMRC change the tax landscape every year; there is no certainty any more, so work with what the plan is now and be very wary of retrospective action that HMRC could apply to your situation (like with Section 24 on BTLs and of course the 2019LC).

[Maslins]

The only risk is if HMRC deny you ER - in which case I don't know : are you forced into paying 28% CGT or can you rollback the MVL application and rethink a strategy (Maslins is this something you can answer?)

With tax laws as they are, and assuming the company being liquidated prior to liquidation is an IT contractor/similar company (ie we're not talking about after it's been used to hold BTL properties for multiple years) then I don't see a risk to ER.

Most of the criteria for ER are very black and white. Assuming you've been a director, own >5%, and it's been going for >1 year, then the only remaining risk I see is whether it qualifies as a trading company. For that, there's 4 x 20% tests. Any ex contractor going into an MVL is realistically going to fail the assets test, as the hefty war chest is not required working capital for the running of the business. However, typically they'd pass the other 3 tests with flying colours. Ie <20% of income will have come from investment, <20% of expenditure will have related to investment, and <20% of director's time would have been devoted to investment related activities. With glowing passes for 3 of the 4 tests, I don't see HMRC challenging it. Of course this changes if someone uses the retained profit to buy BTLs/similar.

Imagining for now that HMRC did challenge an ER claim, then:
1) they'd be doing it well after the liquidation was finalised. The liquidator just distributes funds. The recipient then needs to wait for the tax year they received those distributions in to end, and then complete a personal tax return declaring them. HMRC then have 12 months to challenge. The liquidation would be done and dusted, and couldn't be backtracked.
2) if ER claim were to fail, then it'd likely be 20% CGT payable (not 28%, the extra 8% is pretty much just for property related gains). 20% is of course higher than 10%, but still likely to be better than tax on dividends, assuming you're a higher rate taxpayer in the year of receipt.
3) the above is assuming it's still a capital gain, just one that didn't qualify for ER. If something like the transactions in securities rules were to bite, then ER is irrelevant, as it's not a capital gain at all. Then you would be liable to tax on it all as dividends.

[ChimpMaster]

Is there any point at which the liquidators have to apply to HMRC for clearance, say at a certain cash balance level?

Are there any concerns over money-boxing?

[Maslins]

Is there any point at which the liquidators have to apply to HMRC for clearance, say at a certain cash balance level?

Are there any concerns over money-boxing?

We do ask HMRC for clearance, but that's only re company affairs. We're closing the company, so need HMRC's approval that the company has settled all taxes. It's basically just confirmation that all VAT, CT and PAYE returns have been submitted, and liabilities paid. It has nothing to do with the size of the remaining balance or the personal tax affairs of the shareholder(s).

I recall a discussion document about HMRC not being particularly happy about either phoenixing or money-boxing. They added/tweaked the rules to help prevent phoenixing, but seemingly did nothing re money-boxing.

Thing is with corporation tax rates drifting downwards, and personal tax rates drifting upwards, I can imagine money-boxing becoming a bigger issue as time goes on, not smaller...and it's largely down to tax changes encouraging it! Think in a few years we'll end up with the very common scenario where tax rules encourage one thing, then politicians get grumpy at everyone doing exactly that.

[Crossroads]

Just resurrecting this thread. Chimpmaster I pretty much agree with your points.

My personal situation is that the proposed changes to lettings relief would cost me £80k [on paper] as two of my rentals are ex-PPR's so that adds another dimension. It's over a year away (if it happens as proposed) but is a key milestone in any decision I make, which ultimately is about setting myself up with a tax efficient passive income so that I do not have to work.

[pjt]

Just read through this thread and it sounds like something I am also considering. I have 8 properties held personally most about 50% owned. I have a fairly hefty warchest I can't get access to cheaply (taxes etc). My thinking is if I buy the 8 properties I can not only pay off all mortgages but also get access to the equity I have in the properties personally. I'd then have a fairly good income being generated in the LTD that I can use to cover quiet periods in the contracting game. In effect the properties would be my income buffer.

Benefits
* Pay off mortgages
* Get a hefty equity release to also pay off my house mortgage
* Have 8 mortgage free properties all low maintenance, good rentals.
* Have an ongoing income coming into the LTD even after I retire

Cons
* The properties would be in LTD. Not sure how much of an issue this even is as I intend to keep the properties into retirement.
* Not sure how this would affect my children when I snuff it. But again I'm thinking this may be sorted by appointing them as directors in the company at some point.

Seems like a good plan but I guess I may be missing something.

[ChimpMaster]

Just read through this thread and it sounds like something I am also considering. I have 8 properties held personally most about 50% owned. I have a fairly hefty warchest I can't get access to cheaply (taxes etc). My thinking is if I buy the 8 properties I can not only pay off all mortgages but also get access to the equity I have in the properties personally. I'd then have a fairly good income being generated in the LTD that I can use to cover quiet periods in the contracting game. In effect the properties would be my income buffer.

Benefits
* Pay off mortgages
* Get a hefty equity release to also pay off my house mortgage
* Have 8 mortgage free properties all low maintenance, good rentals.
* Have an ongoing income coming into the LTD even after I retire

Cons
* The properties would be in LTD. Not sure how much of an issue this even is as I intend to keep the properties into retirement.
* Not sure how this would affect my children when I snuff it. But again I'm thinking this may be sorted by appointing them as directors in the company at some point.

Seems like a good plan but I guess I may be missing something.

The Limited company would need to buy the properties from you. This would incur SDLT on the company and CGT on you personally. So you have to factor these costs into the equation.

If your property portfolio is run like a real business and you run it personally, then you might qualify for incorporation relief, though this is unlikely given that you are a full time contractor.

You might find it better to quit working and just manage the properties full-time. This is where I am headed. HMRC have been so punitive in their regime of taxing anything and anyone who wants to grow, that they have made it better not to work and not to contribute to the tax circle. The recent and very ill thought out Section 24 taxation is the prime driver in this.

Golden Goose and HMRC. What a story this makes.

[Maslins]

My gut is still telling me that transferring lots of personally owned properties to a Ltd Co just feels like a really bad idea. You're already aware of the main drawbacks, and I can't specifically flag any clear cut extra ones...but if I were in your shoes it would not be something I would consider doing.

Appreciate the above isn't very helpful...I'd be intrigued in the views of some of the other more experienced accountants on this board.

[craigy1874]

My gut is still telling me that transferring lots of personally owned properties to a Ltd Co just feels like a really bad idea. You're already aware of the main drawbacks, and I can't specifically flag any clear cut extra ones...but if I were in your shoes it would not be something I would consider doing.

Appreciate the above isn't very helpful...I'd be intrigued in the views of some of the other more experienced accountants on this board.

In general terms, buying through a Ltd co can work in certain circumstances and if the plan is long term.

It is in very limited circumstances where transferring properties to a limited company is a good idea, taking into account the CGT and SDLT situation.

[Crossroads]

In general terms, buying through a Ltd co can work in certain circumstances and if the plan is long term.

It is in very limited circumstances where transferring properties to a limited company is a good idea, taking into account the CGT and SDLT situation.

Totally agree. Ltd ownership requires long term consideration, but then again so does investing in property unless simply as an accidental landlord whilst trying to sell a former home.

Agree with the transfer aspect. The angle that intrigues me is that (if I continue contracting) it enables me to extract a large sum from my Ltd at a point where the CGT due would be minimal due to PPR and lettings relief. Fast forward to May 2020 and I could be looking at an extra £100k-ish CGT to do it then due to the proposed abolition of lettings relief. Ignoring that, the sums are marginal and make pensionse/VCT's a better option for minimising income tax.

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