Ask the Experts
Each issue of The Schmidt Report carries Ask The Experts, a regular feature where our experts answer real questions posed by our subscribers (needless to say, their anonymity is preserved). Here are some typical recent examples:
Q. I appreciate for income tax purposes that a husband and wife ownership of a rental property will mean that the rental income/profits will have to be apportioned on a 50/50 basis but where a taxpayer is 40% income tax can you not own a rental property jointly with a limited company with an agreement that the limited company receives the lion’s share of any rental profit, taxable at 22%?
T. E., via email
A. Yes, you can, but the disadvantage comes when you sell the property. The company will pay tax at 22% on the gain, whereas you will only pay CGT at only 18%. Then you have to get the money out of the company at which point, depending on how you do it, you will suffer another tax charge. So the short-term savings may cost you more in the long term.
Q. I have a property I bought in the 1970s. For the last few years, it has been a holiday let and met the criteria. With the recent taxation changes, I am considering selling it. If I sell it before April 2010, how is the “Entrepreneurs” Capital Gains regime applied?
C. R., via website
A. Properties that qualify as furnished holiday lettings are entitled to entrepreneurs’ relief. The gain will be computed by deducting the value of the property in March 1982 (ask the estate who you appoint to sell it to establish a 1982 value as well) from the net sale proceeds. You are then taxed at 18% on 5/9 of the gain, which equates to an effective rate of 10%.
Q. I am the sole director and shareholder of a small company. The assets and business of the company were sold some time ago with the intention of rolling over into a qualifying trade. This never happened and I am now out of time to do this and have paid the tax. I cannot liquidate the company without triggering a large capital gain. The company is now invested in a share portfolio from which I draw dividends. Can I transfer the company shares into a Discounted Gift Trust wrapper and draw 5% tax-free with the capital left to my family on my death? Or any other suggestions?
R. A., via email
A. You have a tax-inefficient investment company where any returns arise from capital gains due to corporation tax applying on such gains rather than the flat rate for individuals of 18%. Franked income should offer some relief to corporation tax but it depends on the level of income arising and the corporation tax rate of the company. Any transfer of the company shares to a trust will trigger capital gains tax (CGT) unless holdover relief applies.
There are a few offshore investment bonds that offer a ‘private fund’ arrangement, and so you could transfer the investment company into that tax wrapper and as such all future dividends from the company and gains arising from any future disposal of the company would be tax-free within the bond, although UK corporation tax would still apply to the income and gains arising within the company on its share portfolio. The tax saving on deferring personal tax on the dividends from the company within the bond may well be negated by the costs of the bond ‘wrapper’. Also, the CGT crystallised as a result of transferring the investment company into the bond would need to be taken into account when reviewing the effectiveness of the arrangement.
I would suggest becoming non-UK-resident for five years then binning the company and its portfolio and starting again.