1. WELCOME TO

2. 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%

3. 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, per month or £120,000 per a year
£550,000 equity
Repayments of £ per month or
£11,550 per year

4. 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

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

6. 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 up to £32,000 (HTP threshold): £32,000 x 20% = £6,400
Tax to above £32,000 to £86.450= £55,250 x 40% = £21,780
TOTAL: £28,180

7. 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%

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

9. 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

10. 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

11. Taxation after Going Ltd
Rental income £120,000
Mortgage Interest £11,550
Profit £108,450
Take a salary £11,000 (Personal Allowance) x £22,000
Taxable income £86, 450
Dividends Personal Allowance (£5,000 X 2) £10,000
Taxable income £76,450
Mrs Smith Taxable income: £38,225
Mr Smith Taxable income: £38,225
Dividends Tax to 7.5% up to £32,000 (HTP threshold): £32,000 x 7.5% £2,400
Dividends Tax to 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, x 2) £8,846.26

12. 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, P/A
So, the personal taxation saving is £23,
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.

13. 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, p/a makes this solution as you can ascertain, extremely beneficial”

14. 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

15. 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.

17. AJAY KHOSLA (DIRECTOR) Independent Financial Advisor
@pretiumtax
58 Regent Road , Leicester LE1 6YJ