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Sam
Sam, Accountant
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Capital Gains Tax and Stamp Duty Questions. My wife and I

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Capital Gains Tax and Stamp Duty Questions.
My wife and I own a freehold property which we purchased in November 1988. The freehold consist of two self contained flats, one of which we lived in as our main residence for around three years. The other flat had a sitting tenant in residence paying a small rent. At the time we had one residential mortgage secured against the freehold. When we moved from our flat we let out our property and when the sitting tenant moved out we let that flat too for normal market rent. Shortly afterwards we re-mortgaged on a proper Buy to Let mortgage which was secured against the freehold. We having been trying to re-mortgage again to raise additional funds but also to fix the loan on a competitive rate of interest, but our current lender has changed their lending policy, as have many other lenders, and state that they will not lend against freeholds where there is more than one unit in a block, obviously we have two. We have now found a solution but wanted to clarify the position regarding stamp duty and capital gains tax.We have been advised by our solicitor and accountant to do the following:Set up a Limited company (a property management company) with my wife and I as equal shareholding company directors. Transfer the freehold title from ourselves (currently held jointly) into our limited company with a nominal value of £1. The limited company will then issue to my wife and I (jointly) a lease of 999 years on each of the flats. Again this is at a nominal value of £1. Each property will then have its own mortgage secured against the leases. The freehold transfer, creation of the two leases, paying off the existing lender and setting up the two new mortgages will be completed all on the same day by the solicitor.Question 1.Doe the transfer of the freehold to the limited company and/or the creation of the leases trigger a capital gains tax issue now, bearing in mind that the properties are not being sold at this time.Question 2.Although the freehold transfer and leases are being created at a nominal value do these actions trigger any stamp duty issues, particularly as the new 3% additional stamp duty now applies on second properties. Although, we are not technically purchasing or selling any assets at present.Thank you for your assistance
Submitted: 9 months ago.
Category: Tax
Expert:  Sam replied 9 months ago.

Hi

Thanks for your question - I am Sam and I am one of the Uk tax experts here on Just Answer.

Could you advsie what the solution is and I can advsie re the capital gain and Stamp duty position (although may need for more info re stamp duty)

Thanks

Sam

Customer: replied 9 months ago.
Hi Sam,The solution is as explained in my text, setting up of the limited company and transferring the freehold into it and then creating the two leases in mine and my wife's names.In addition, if it helps explain better, we have found one lender willing to grant a mortgage in our names on each of the properties, even though there are two units in the one block. They want the leases in place, but as the solicitor made clear to us, as freeholds we can't rent (lease) to ourselves a property that we already own, hence the reason to set up the limited company and transfer the freehold into it.Thank you.Martin
Expert:  Sam replied 9 months ago.

Hi

I do apologise the extra bit re the limited company did not appear with the first post.

Limited companies cannot just own property they have to trade in a business- and whilst they can own the freehold side of mattes- the rental income still is just that rental income.

But the act of transferring the freehold will create a capital gain and stamp duty as its a legal change of ownership (transfer) and yes the 3% additional stamp duty will apply again as change of legal ownership and not your main residences.

You cannot run the rent through the company I am afraid.

I am sorry the news is not better

Thanks

Sam

Customer: replied 9 months ago.
Thank youWe are aware that the rental income cannot be run through the company. There will be very little therefore in monetary terms traded through the business.Our main concern is to clarify the GCT and SD issues.The solicitor informs me that the freehold itself has very little or no value, as the value exists in the leases, hence the £1 value he has placed on it. Presumably if CGT and Stamp study apply it will be based on £1, is that correct?Martin
Customer: replied 9 months ago.
Thank youWe are aware that the rental income cannot be run through the company. There will be very little therefore in monetary terms traded through the business.Our main concern is to clarify the GCT and SD issues.The solicitor informs me that the freehold itself has very little or no value, as the value exists in the leases, hence the £1 value he has placed on it. Presumably if CGT and Stamp study apply it will be based on £1, is that correct?Martin
Customer: replied 9 months ago.
just checking you received my last comments?Thank youMartin
Expert:  Sam replied 9 months ago.

Hi

Thanks for your responses, I was with clients hence the delay

The freehold is going to have a value greater than £1 so you must get a market value valuation undertaken for both the CG and SD position to be established, rather than the base (peppercorn) value that a solicitor (or you) propose.

Thanks

sam

Customer: replied 9 months ago.
Thanks SamAnother few questions to put to you if I may.Am I correct in saying inter spousal transfers do not attract CGT or stamp duty? Although if this is the case I assume the spouse in receipt of the asset will inherit the transferring spouse's original base/purchase costs.If my wife and I, as joint freeholders, first create leases in our joint names (so that we own the bricks and mortar so to speak) and then subsequently transfer the freehold title to the property management company, will this avoid the CGT and SD issues as the value being transferred is only the freehold title which has no significant value?Or are there any other ways that to avoid these taxes? Its not that we are trying to avoid the tax all together, as we fully expect to pay CGT on the whole gain when we eventually sell, but we do not want to be taxed twice on something we have technically owned throughout.Many thanksMartin
Expert:  Sam replied 9 months ago.

Hi Martin

Thanks for your further questions and asking for me

Yes you are correct - spousal transfers do NOT give rise to capital gains or stamp duty as transfers between married couples neither create a gain or a loss so yes they take on the original costs to purcahse to be considered against disposal.

No - you will still incur a capital gain and stamp duty consideration against a future transfer to a limited company.

We are not able to offer an advisory service as we would need to see all your tax position to best advise any possible tax mitigation - and we are just an information service and not equipped to offer a full service, you are best seeking a consultation with a local accountant for that

Thanks

Sam

Customer: replied 9 months ago.
Ok, thanks for all your help Sam.RegardsMartin
Expert:  Sam replied 9 months ago.

H Martin

You are very welcome and it would be appreciated if you would rate the level of service I have provided (or click accept) then Just Answer credit me for my time

Thanks

Sam

Sam, Accountant
Category: Tax
Satisfied Customers: 13778
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
Sam and other Tax Specialists are ready to help you
Customer: replied 9 months ago.
Hi Sam,Sorry, I closed my browser yesterday before rating you, sorted it now though.I have a further question in relation to my previous topic. I should point out that I have been receiving advice from an accountant on this matter and it is emerging that he is messing up quite badly. Before seeking advice from another accountant I thought it best to fire the questions at an expert first, your good self, before establishing whether the next accountant has the right credentials.The management company is now not an option for us. The accountant informs me know that if we (as joint freeholders) grant ourselves two leases (one on each flat and held in joint names) SDLT will apply because we have an existing outstanding mortgage of £292,000 secured against the freehold title. The mortgage is held jointly, not tenants in common.
The market value of each flat is £340,000. he is able to calculate what the tax might be and whether the addition 3% applies. Do you have an indication of what the tax might be, or indeed if stamp duty applies at all as we are married? and if it does apply can the SDLT be reduced because it is held jointly and therefore we can benefit from two lots of nil rated SDLT (below the £125,000 threshold)?Secondly, all the transactions will complete on the same day, but the solicitor has hinted that they can be arranged in a certain order. So for example, the new lender sends the funds over to the solicitor, the solicitor then repays the existing mortgage so that at that point there is no mortgage secured against the title. The leases are then granted to my wife and I and then the new mortgage is secured against the leases. Would this avoid the stamp duty position.Hope this all makes sense.Kind regardsMartin

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