BPR

[Feedback]

a client has around £2.3m of assets of which £750k is main residence so covered by NRB and RNRB, with £1.5m being rental property held individually or via limited company. The client is open to disposing of the owned property and company and reinvesting into a qualifying company so BPR can be claimed for the purposes of IHT.

The issue is whether a suitable existing business can be found. My view, which I seek opinions on, is whether it would be better to:-

1. gift the business assets and claim hold over relief - can this be done on resi?
2. sell the property rental business (owned and limco) and set up newco, applying for EIS and thus deferral relief when a suitable business can be acquired...CGT dies with the taxpayers and the new assets are outside the scope of IHT...

the mechanisms for selling the property vary given the corp tax implications hence why it is preferred a buyer would want to buy the company rather than the properties individually...

thoughts...

[AGoodman]

The only way you will get holdover relief for a BTL or a company invested in BTL is if you make it a chargeable transfer and claim relief under s.260 (say a gift into trust). This effectively limits the gift to the available nil rate band (and of course uses it up for the next 7 years). Holding an investment property does not constitute trading for s.165 purposes. The position may be different if either the client or the company is actually trading - say building or redeveloping the properties - but it sounds more like an investment from your brief description below.

Option 2 sounds feasible in theory but (in the absence of any knowledge of the client) it does sound rather difficult to implement in practice unless you/the client either sources an EIS company looking for investors or puts cash into an EIS portfolio compiled by one of the providers operating in this area. You refer to "buying" a new company but of course EIS is limited to 30% ownership of a qualifying company.

AG

[Feedback]

typically the client has 3 options:

1. Family Trust/Hold-over Relief - gift into trust upto £650k, 7 year rules apply. repeat after 7 years, although total trust will then be subject to 10 year charge on the value of the trust...
2. EIS - dispose of assets and invest into either a local business taking no more than 30% or invest in an EIS scheme via a provider. I assume there are rules regarding connected persons limiting the 30%.
3. BPR - dispose of assets and re-invest in a qualifying trading business

1 is clearly the easiest and allows them to retain control
2 is not really appropriate for a long term strategy, and any IHT saved is likely to be lost through a reduction in asset value
3 is the motherlode....

have I missed anything...

[Feedback]

sorry, one other point, the client could also dispose of any assets and invest the proceeds into a pension fund, naming the children as beneficiaries....is that even possible as I know nothing of pensions...

[AnthonyR]

sorry, one other point, the client could also dispose of any assets and invest the proceeds into a pension fund, naming the children as beneficiaries....is that even possible as I know nothing of pensions...

Yes... but:

Assuming they are not over 75, they can contribute into a personal pension up to their net relevant earnings (NRE). However, NRE doesn't include property income, so this may leave them with limited options.

The company could make contributions in recognition of their service to the company which wouldn't require NRE, however, this will still be limited to £40,000 a year (with 3 years carry forward of unused relief if they had existing pension schemes), assuming the company can commercially justify a large contribution. If they have started taking benefits from any pensions they will be capped at £10,000pa.

The other option outside of EIS, is to look at a managed AIM portfolio, which would also qualify for BPR if properly set up.

[Feedback]

If Mr and Mrs client wholly own a resi rental property and they also own 100% of the shares in holdco, a company that owns 5 resi rental properties, if holdco transfers legal title to a family trust at arms length (the total profit on disposal is near to zero as the profit on one offsets the loss on the other), does this count towards the NRB of £325k per taxpayer as Mr and Mrs client have ultimate ownership?

my thinking is Mr & Mrs client transfer the wholly owned resi into a family trust (value say £300k), plus transfer two other properties from holdco into the trust (value say £480k), total transferred would be £780k. SDLT etc would be payable where applicable. As the holdco would have an overdrawn DLA, the trust could raise mortgages (all properties are currently unencumbered) to clear the DLA.

1. does the transfer from holdco count towards the NRB or will Mr and Mrs Client only be considered to have transferred £300k into trust, ergo under the combined NRB limit
2. can the trust offset any mortgage interest - I assume it can as any other business
3. there are sufficient cash and reserves in holdco so income can be drawn down as divs at 7.5%

[AnthonyR]

How is the company transferring the properties at arms length? Is it a sale with consideration left outstanding? This will trigger SDLT including the 3% surcharge, but won't be a chargeable transfer for IHT purposes if it's at market value as there's no loss to the estate (the £480k outstanding is still an asset of the estate). At that point the Trust's assets will be £780k in property, less the £480,000 debt. Total £300k in the trust.

If you are then raising a mortgage in the trust (check that you can prior to this - depending on the trustees and properties) and the trust clears the debt it will have £780k in property less the £480k mortgage - still total £300k.

Clients will have property company with £480k in cash instead of the properties. Which is of course subject to IHT still.

Trust will be taxable at 45% on income and will be able to offset the mortgage interest in full for the next 3 days, then (on 6 April 2017) 75% for a year, then 50% for another year, then 25% for the final year before the full mortgage interest relief restriction is applied. A tax credit of 20% will be brought in, in line with the restriction of mortgage interest relief. Where income is distributed the beneficiaries may be able to reclaim some of that overpaid tax.