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bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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My wife and I have several buy to lets. We are likely to sell

Customer Question

My wife and I have several buy to lets.
We are likely to sell some of these (possibly at about the same time) later in life to pay off mortgages etc.
There would be a issue therefore of the total gains exceeding a single years capital gains allowance.
Can we "bank" annual capital gains allowances buy selling one a year to a limited company (that we would get set up) at a true gain, in advance to the big sell off and so manage to bank the intervening capital gains allowances ?
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Hi Thanks for your question - I am Sam and I am one of the UK tax experts on Just Answer. There are no banking of unused capital gains annual exemption allowances, there are either used in any one year or lost I am afraid. And even if permitted, the sale of a property to the limited company in itself would create a capital gain, (using that years entitlement of allowance up but still generating a charge of you both) and then see corporation tax arising on the properties rental income each year and a further capital gain (corporation tax) due on the disposal of each asset (property) so this is NOT a cost effective plan. Plus you have to review the factor that limited companies cannot own solely property - as normal rental income is not deemed to be a trade so only B & Bs or Hotels or HMO where additional services are provided, or a trade that operates a business that then happens to own property as assets Do let me know if you have any follow up questions on the answer I have provided.ThanksSam
Customer: replied 2 years ago.

Thank you for your reply.

The purpose behind the sale is to crystalise an existing gain against say this years allowance so that this years allowance is used up rather than wasted. The objective being that when sold, say in 3 tears time, only the gain within the period owned by the company falls into tax, assuming that the gain at the moment is fully covered by this years allowance.

I am puzzled by the point that buy to lets are not allowed for ltd companies as many accountants are suggesting moving buy to lets over to limited companies in the light of the tax changes in George.

Osbourne's recent budget.

Are the accountants or myself missing something ?

Expert:  Sam replied 2 years ago.
Hi I understand what you are saying but as limited companies cannot own just rental property - then this is anon starter.I am not sure why you are puzzled by this - as limited companies are for TRADE and business purposes only and rental income is Schedule A not Schedule D income - and I cannot comment on the misguidance other accountants offer - I can only advise what HMRC state ! The initial guidance on Limited companies here and what constitutes trading and not trading https://www.gov.uk/guidance/corporation-tax-trading-and-non-tradingAnd when there is no trade and just rental income ( that does not fall within trade such as B & B - Hotel etc) the lefal statuite that states (from HMRC) that this is NOT permissible other then the listed occasions http://www.hmrc.gov.uk/manuals/pimmanual/pim4300.htm Which areThis can only be done in the following circumstances:the accommodation must be temporarily surplus to current business requirements,the premises must be used partly for the business and partly let; in other words, rents from a separate property which is wholly surplus must be dealt with as property income,the rental income must be comparatively small (since otherwise, the tax liability resulting may not approximate to the strict statutory liability),the rents must be in respect of the letting of surplus business accommodation only and not of land.Yours do NOT fall within this remit - you bought them in your personal names - receive ongoing rental income (long or short term assured contracts) so this is treated as RENTAL income - not trade income .Let me know if I can be of any further assistance, and I am sorry I do not endorse the answer your seek, but as an expert and professional I am sure you can appreciate I give that expert advise rather then offer you want you want and you end up in more difficulty with HMRC in the future. Its on the basis I hope you rate (click accept) ThanksSam
Customer: replied 2 years ago.

Their are many thousands of limited companies in the UK which do this and about 100 mortgage providers who provide funds for this purpose.

Perhaps I am using the wrong terminology within this question.

Please see the following extract re classifications.

Companies that trade only in rental property are known as Special Purpose Vehicle (SPV) limited companies and they can be classified in different ways by lenders, according to the Standard Industry Classification (SIC) code that the company is registered under at companies house.

Typically these include:
7012 – Buying & sell own real estate,
7020 – Letting of own property, or
7032 – Manage real estate

If your view remains at odds with the practise within the uk please advise on how I can transfer my question to someone who is closer to this area.

Thanks

Expert:  Sam replied 2 years ago.
Hi Yes they do but the properties either fall into trade use OR are such that they have been purchased along with a trade existing - and you do NOT fall into either category.Special vehicle purpose usually relates to the build on new homes, that then may go on to be let (so the trade is the construction of said property) but do NOT apply to your situation adn I am shocked that any lender would encourage you to enter into such an arrangement that goes against ALL that HMRC advise on. I have provided you with the HMRC legislation - I cannot argue the point beyond that endorsement, which I am sure you cab appreciate. I have no issue with your challenging or exploring furtehr your thoughts, beliefs or advise offered elsewhere, but I can only offer my expert opinion, which I have backed up with HMRC legislation and offered an expert explanation as to why If you would like me to opt out so another expert can answer - I am more than happy to do soThanksSam
Customer: replied 2 years ago.

Thank you for your view.

I have done further research and confirmed the industry practise of using special purpose vehicles for this purpose.

I would like to accept your offer of you opting out so as to open up the question to someone who has experience of SPVs and capital gains.

Is there an action that I need to take to open this question to others or is it an action by yourself ?

Expert:  bigduckontax replied 2 years ago.
I concur with my colleague's opinion.
Customer: replied 2 years ago.

Please could explain why for a considerable time (years) the industry has used SPV's for ltd company buy to lets yet the view is expressed that this would not work ?

Expert:  bigduckontax replied 2 years ago.
I must leave this for my colleague's attention.
Customer: replied 2 years ago.

I do not wish to be impolite but the issue is your colleague no dougt has great experience but it appears not in this area, so I was hoping to find someone who has.

Expert:  bigduckontax replied 2 years ago.
Ah, I see your problem. To reduce or minimise your Capital Gains Tax (CGT) you could trickle out these properties over a series of tax years to maximise your Annual Exempt Amount (AEA), currently 11.1K. The AEA cannot, as my colleague explained, be carried forward, it is a 'Use it or loose it' concession [HMRC speak]. Selling to a company would merely trigger a CGT liability for you at the point of sale. Companies are not subject to CGT as such, any gains made are merely included in the company's Corporation Tax computation. As you may be aware recent changes in personal taxation will mean interest only being allowable at the basic rate in stages from April 2017 thus making a corporate envelope a more attractive proposition from that point of view. However, you still do not get away from Benjamin Franklin's dictum that in life there are but two certainties, death and taxes for, as you have been told, a transfer to a company would trigger a personal CGT liability. The Telegraph has a good resume on this subject and some of the pitfalls; it is available here: http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11221498/Im-a-buy-to-let-investor-could-I-pay-less-tax-by-setting-up-a-limited-company.html
Customer: replied 2 years ago.

Thanks for the reply

May I expand on the banking of capital allowances point in the original question.

Assume I have 5 properties in joint names.

Each cost 80k and are now worth 100k and we joint have 20k annual capital gains tax allowance.

In year 1 we sell the first property to the ltd company for 100k and use up that years allowance with no tax to pay.

We repeat this each year until all 5 are owned by the ltd company and are on the books for 100k each.

At the end of 5 years we wish to sell all 5 each of which are now worth 105k.

Total capital gain which falls into tax (corporation) is 5x5= 25k

Whereas if we had not sold to the ltd company the gain subject to income tax would be 5x25 =125 -20(being one years capital gain allowance) = 105k

Assuming this works then my libility is much reduced because I have in effect "banked" 5 years of capital allowances.

My question is therefore would this work ?

Expert:  bigduckontax replied 2 years ago.
Yes and no; companies are not subject to CGT so the 125K profit in the company would be taxed at 20%. Companies have no entitlement to AEA> Thus the company's tax bill would be of the order of 25K.
Yu could probably save tax overall this way. As you are probably aware CGT is charged at 18% or 28% or a combination of the two rates depending on the individuals' income including the gain in the tax year of sale. If you were being taxed at 28% ten clearly the CT at 20% is in your favour.
Customer: replied 2 years ago.

Thank you for the reply, the rates are an interesting point, perhaps I could however illustrate a little more clearly the central part of my question.

The 125k gain would only exist if the properties were not sold to the company. In which case the gain would be a personal gain.

By selling to the company over the 5 years each property is in the company's books at 100k so when sold there would be a 5k gain per property ie 25k overall.

In this example the objective is to switch a 125k personal gain for a 25k corporate (both figures beings for all the 5 properties).

Is there anything I have not thought that would get in the way of this tax saving ?

Expert:  bigduckontax replied 2 years ago.
The gain would exist if the properties were disposed of in any way with the exception of the transfer being to a charity. Disposal to the company would immediate;y trigger a personal CGT liability. The subsequent sale by the company would generate another gain in the company's books, but subject to CT at 20%. It will work, if a bit laborious as I explained in my original answer. Please be so kind as to rate me before you leave the Just Answer site.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4195
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.