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REDUCING TAX FOR PROPERTY INVESTORS ATTACK ON LANDLORDS? SDLT changes 3% surcharge to discourage Levied on any price over £40,000 Extremely complex rules Will raise £600m per year Wear & Tear Allowance New rules as of 6th April 2016 Replacement items qualify New properties with no white goods –NO RELIEF Existing properties with white goods –FULL RELIEF Mortgage Interest ( New Rule) Interest no longer deducted in rental accounts Relief only at basic rate –20%

HOW WILL THE NEW INTEREST RULES AFFECT MY RENTAL PROFIT? Current Rules Mr & Mrs Smith Current value of portfolio £900,000 Have 7 HMO’s properties over a 10 year period Rental Income per a property was £1,428.57 per month or £120,000 per a year £550,000 equity Repayments of £962.50 per month or £11,550 per year

Transfer into a LTD Company To offset the Mortgage interest OBJECTIVES Transfer into a LTD Company To offset the Mortgage interest Reduce overall taxation Mitigating potential inheritance Tax 40% of equity allowance

Asset Value shares LTD CGT (£147,840) Stamp Duty Land Tax £900,000 (£34,999.93)

HOW WILL THE NEW INTEREST RULES AFFECT MY RENTAL PROFIT? TAXATION PRE APRIL 2017 Rental income £120,000 Mortgage Interest £11,550 ---------------------------------------------------------------------------- Profit: £108,450 Salary: £0. Personal Allowance (£11,000 X 2) £22,000 TAXABLE INCOME: £86,450 Tax to pay @20% up to £32,000 (HTP threshold): £32,000 x 20% = £6,400 Tax to pay @40% above £32,000 to £86.450= £55,250 x 40% = £21,780 TOTAL: £28,180

Relief only at basic rate 20% How will the new interest rules affect my rental profit, post April 2017? NEW RULES Relief only at basic rate 20%

HOW WILL THE NEW INTEREST RULES AFFECT MY RENTAL PROFIT POST 2017? Rental income £120,000 Profit £120,000 Salary £0. Interest: £11,550 @ 20% £2,310 Deduct Personal Allowances (£11,000 X 2) £95,960 Tax to pay @20% up to £32,000 (HTP threshold): £32,000 x 20%= £6,400 Tax to pay @40% above £32,000 to £96,490= £64,490 x 40%= £25,496 TOTAL: £31,876

HOW WILL THE NEW INTEREST RULES AFFECT MY RENTAL PROFIT? Increased tax liability of £3,696 - This could push some landlords into 40% tax bracket Solutions for Mr and Mrs Smith? Run portfolio structure as a proper business through going Ltd without CGT and SDLT charges! Challenges of going Ltd Value £900,000 Equity £550,000 CGT (£550,000-£22,000) X 28%=£147,840 SDLT £34,999.93 Total Liability £182,839.93 The issue would be that, when transferring the properties into a Ltd company, this incurs two types of charges:- Capital Gain Tax (CGT) This is the gain or the difference between the cost price and the market price (this includes the subtraction of the allowance of £11,000 x 2) multiplied by 28% = £147,840 Stamp Duty Land Tax (SDLT)- £34,999.93  

THE ADVANTAGES OF INCORPORATING A RENTAL PORTFOLIO IN SUMMARY ARE A company pays tax on income at 20% corporation rate (From 2017, this will be 19% and 2020 will be 17% ), Whereas an individual(s) will pay tax at their personal rate equivalent to either 20%, 40% & 45% determined by the amount that has been earned. Mortgage interest Is relieved in full. CGT is avoided

Taxation after Going Ltd Rental income £120,000 Mortgage Interest £11,550 Profit £108,450 Take a salary £11,000 (Personal Allowance) x2 £22,000 Taxable income 1 £86, 450 Dividends Personal Allowance (£5,000 X 2) £10,000 Taxable income 2 £76,450 Mrs Smith Taxable income: £38,225 Mr Smith Taxable income: £38,225 Dividends Tax to pay @ 7.5% up to £32,000 (HTP threshold): £32,000 x 7.5% £2,400 Dividends Tax to pay @ 32.5%: £32,000 to £38,125 = £6,125 x 32.5%% £2,023.13 Individual Tax Total (£2,400 + £2,023.13) £4,423.13 Mr and Mrs Smith Total (£4,423.13 x 2) £8,846.26

TOTAL ANNUAL SAVING OF GOING LTD   Taxation Prior to turning Ltd: £31,876 (post April 2017 taxation figure) Taxation Post Going Ltd: £8,846.25 Total Saving (£31,876 - £8,846.26) £23,029.75 P/A So, the personal taxation saving is £23,029.75. This is due to Mr and Mrs Smith now being able to deduct in full the mortgage interest and restructure the way they withdrew profits in the form of income and dividends.

HOW OUR SOLUTION TAKES ADVANTAGES OF STATUTORY RELIEFS TO AVOID CGT, SDLT & IHT A Ltd Company is set up ( Property transferred into this normally would incur a CGT & SDLT charge.) Proprietors are named as directors. You would still mange and have full control of the property portfolio. The assets are transferred to the LTD company, without Capital gains liability or SDLT, provided you meet certain conditions. The Value of the properties to the business are uplifted to their current market value. The assets are exchanged for shares to the directors “The saving of £182,839.93, as well as the £23,029.75 p/a makes this solution as you can ascertain, extremely beneficial”

INHERITANCE TAX (IHT) Allowance of £325,000 each, known as the ‘Nil Rate Band (NRB)’ This is not increasing with inflation for at least the next 11 years The beneficiaries have to pay 40% of the equity in property, 6 months after death Mr and Mrs Smith has no IHT due. Combined ‘Nil Rate Band (NRB) £650,000 for both and their equity is £550,000, it is below their collective allowance. But could be exposed going forward, as their equity increases (hence, the mortgage capital amount decreases with repayments and/or with property prices increasing with time) and/or they add to their portfolio. If however, Mr and Mrs Smith had three times their current equity, so £550,000 x 3 = £1,650,000. The IHT liability would be as follows (presuming they have each used their respective ‘annual exempt gifts’):- £1,650,000- £650,000 (Nil Rate Band x2)= £1,000,000 £1,000,000 x 40% (Rate of tax in excess of NRB)= £400,000

SPECIALIST TRUST: AVOIDING IHT AND A STORE OF FAMILY WEALTH Shares are transferred to a Trust (s.86) Trust is a tax wrapper, takes assets out of your estate In turn, no IHT to pay regardless of asset value increase Other Benefits Valid for 125 years Used to the next generations Keeps the assets within the family: protect against if beneficiaries are ‘Unlucky in Marriage’ and ‘Creditors’ Run your business a per usual No Impact on how you run your business i.e. buy and sell as per usual, income is drawn out as per usual with a Ltd company.

AJAY KHOSLA (DIRECTOR) Independent Financial Advisor 07515721763 ajay@pretiumtaxplanning.co.uk www.facebook.com/pretiumtaxplanning @pretiumtax 58 Regent Road , Leicester LE1 6YJ