If you have a property portfolio of 4 or more properties, did you know it is possible to:
Reduce the 40% Inheritance Tax rate to 0%.
Reduce the 28% Capital Gains Tax to 0%.
Reduce Stamp Duty to NIL?
OUR three-stage approach…
1. Partnership (for at least 1 year)
2. Incorporation (for 2 years)
3. Trust (thereafter)
Partnership
A partnership must be formed and formalised if the properties are not held jointly with someone else. 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 some advisors) before incorporating.
The partnerships are formalised and registered with HMRC, and a partnership deed is drawn up. Your accountant should produce the partnership accounts at the end of year 1.
Incorporation
Incorporation relief for capital gains tax can be claimed if HMRC sees 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 their 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. If there are Mortgages 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.
Trust
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 there is a holding/trading company structure the holding company) are transfered into the trust. The trust is controlled by the trustees which will be you and others of your 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)
Summary
In short, it is possible for your 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 re-mortgage. Furthermore, mortgage interest relief can be claimed against corporation tax.
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