Transferring company assets question

[rob.jarvis]

My partner & I own 4 rented properties as a private investment. We are considering relocating and buying a holiday letting business but require the equity from the rented properties to start this up. We cannot remortgage as the rents wouldn't cover it.

We have been informally told that to avoid or reduce CGT, we could setup a limited company to buy the properties, then sell them through the company to buy our holiday letting business.

Thanks

Rob

[johnj]

Yes that can work, there is an SDLT cost though.

[Tax Accountant]

Yes that can work, there is an SDLT cost though.

If you sell your own properties to your own company, surely this is a transaction between connected persons and therefore the transfer will be deemed at market value for CGT purposes.

So how do you think you intend to reduce or eliminate CGT on transfer of your rented properties to your own company?

Ramnik

[johnj]

But it can work.
The incorporation relief can exempt a paper gain between the connected parties of the investor and the company.
The company gets the property at market value because its shares which it issues thereby have value (the market value of what it has been given), hence the stamp duty charge. But if the arrangement is done properly the investor is protected from a capital gains tax charge by the incorporation relief. If the company then sold them on for their then market value there would be no gain as it has inherited todays market value and the proceeds could be reinvested gross.
There are embelishments that can make the process even more attractive.
And yes countless people have done this if their advisors were familiar with the process and the documentation is complete and correct.

[Tax Accountant]

But it can work.
The incorporation relief can exempt a paper gain between the connected parties of the investor and the company.
The company gets the property at market value because its shares which it issues thereby have value (the market value of what it has been given), hence the stamp duty charge. But if the arrangement is done properly the investor is protected from a capital gains tax charge by the incorporation relief. If the company then sold them on for their then market value there would be no gain as it has inherited todays market value and the proceeds could be reinvested gross.
There are embelishments that can make the process even more attractive.
And yes countless people have done this if their advisors were familiar with the process and the documentation is complete and correct.

John J,
Please excuse my weakness on the subject. In order that I understand this better, could you please expand on your reply. Assuming the property value is say £500,000, the company issues £500,000 worth of shares to the owner in return for selling the property to the company. Would the owner then rollover the gain on the property against the value of the shares and thereby avoid having to pay any CGT on the transfer of the properties to the company? Is this what you meant by incorporation relief?

My queries are:

(1) Would the individual obtain rollover relief on sale of investment properties?

(2) Even where rollover relief is available, does this then not involve potential loss of taper relief and annual exemptions which would be available if rollover relief was not claimed?

Ramnik

[johnj]

If the only consideration given by the company is shares then it does not matter whether it issues 1 or 50,000 as the share(s) carry the value of the companies assets. It (the company) has therefore given consideration and gets the current value as its capital gains tax cost.

What stops the individuals gain, computed by reference to the property's market value (in this example being equal to the value of the share(s) received), being taxable is the incorporation relief which can be available to an investment property business, so long as it is run as such and the owner is 'active' in its management and not just a passive absentee landlord.

you would contemplate this route if the gain after taper atc is larger than the client is prepared to suffer. Subsequently one can undertake conventional planning to get value out of the company. For a non UK domiciled person the step can also take the value of the property (company shares) out of his chargeable estate for Inheritance tax purposes at a stroke.