How to avoid IHT on Directors Loan

RayMob

I am thinking of moving my BTL Portfolio into a Limited Company to reduce my tax bill and hopefully reduce the IHT that will need to be paid on my estate. When the Properties are moved into the Ltd Company I will have a Directors Loan account approx £1m in credit.
I will no the able to withdraw enough income from the Ltd Company to reduce my Direcetors Loan account to zero. Therefore when I pass IHT will need to be paid on the Directors Loan by my daughter who inherits my estate.
In order to minimise the IHT I want to gift a portion of the Directors Loan to my daughter when the Ltd Company is established so that after 7 years there will be no or very little inheritance tax to be paid.
Is this allowed and if so will my daughter avoid having to pay CGT on the Gift?

Keep_pedalling

Have you taken in to account your CGT liability on the transfer and the stamp duty the your Ltd co. would need to pay?

RayMob

I could Incorporate the properties as a business to a Limited Company to avoid CGT but I would still need to pay SDLT. This would be cheaper but I wouldn't then have a Directors Loan as the properties value would be reflected in the share price.
Paying CGT and SDLT is more expensive but I can then make my daughter the shareholder and I would be the Director. The share value would be zero because the Company would be valued as zero because the assets would be financed by Directors Loan and Mortgage. When the properties increase in value over time the share price will increase but no IHT will be payable on the shares. I can draw down all profits from the company to repay the Directors Loan as an income. If I want to see a property I can and again draw down the equity to repay the Directors Loan. My concern is the Directors Loan will never be fully paid off and will be included as an asset for IHT when I die.
I think it is better to pay approx £250k CGT now so my daughter will now be lumbered with a much larger (approx £850k) IHT bill.

RayMob

There are 10 Properities that I own jointly with my wife, we've been doing BTL for over 18 years. We use an agent to advertise and vet the tenants. We interview the tenants and select the ones we want, we self manage, so the tenants call us directly to report issues. We arrange maintenance/repairs, GSR, EPC, EICR, agree rent increases, collect rents, chase debts, do the check in report, do the check out, clean after check out etc... The only other activity that we rely on fr the Agent is sending out tenancy renewals and getting them signed. As such we should pass the threshold to claim we are operating as a business for Incorporation Relief on the CGT.
The £250k is just CGT, the SDLT is approx £150k (if more than 6 properties ae registered any the same time they come under Non-Residential SDLT which is cheaper.
I could try to claim we are operating as a partnership which would mean we could avoid the SDLT altogether but I am advised that we would need to establish a formal partnership and have it established for at least 2 years. Otherwise HMRC could challenge it as Tax evasion and make us pay it anyway (with penalties).
I'm not sure about waiting 2 years. If property values (currently about £3.5m) increase by 4% a year the CGT and SDLT will increase, there is also a chance that HMRC change the rules and of course worst case one or both of us die. Also, a number of the properties are coming up for mortgage renewal so penalties for withdrawing from the mortgages are only about £15k.

It's good that I probably gift part or all of the Directors Loan credit to my daughter. I'll need to further check on what the share price will be and how hope value might work.

Grumpy_chap

The OP seems to have a substantial estate that they wish to pass on in the most efficient manner.
The OP seems to have identified a complex mechanism towards achieving this aim.
That seems to warrant specialist professional advice rather than free but possibly incomplete or erroneous advice from an internet forum.

poseidon1

Grumpy_chap said:

The OP seems to have a substantial estate that they wish to pass on in the most efficient manner.
The OP seems to have identified a complex mechanism towards achieving this aim.
That seems to warrant specialist professional advice rather than free but possibly incomplete or erroneous advice from an internet forum.

I have to agree.  Professional advice from a full services Chartered Accountancy firm would seem highly appropriate here.

Other than the 'solution' suggested by the OP, there  are other strategies such as Family Investment Companies, trusts, good old fashion life assurance or a mix and match of a number of such strategies that could achieve his ultimate objective. There are also ancillary non tax considerations such safeguarding family assets from a bad marriage, prenups where marriage by daughter contemplated in the future, etc.

 Professional advice ( in the round)  must be the way to go.

RayMob

Grumpy_chap said:

The OP seems to have a substantial estate that they wish to pass on in the most efficient manner.
The OP seems to have identified a complex mechanism towards achieving this aim.
That seems to warrant specialist professional advice rather than free but possibly incomplete or erroneous advice from an internet forum.

I agree totally.
I have started a review with a tax consultancy firm through my accountant. Most of what I have posted is a repeat of their advice. They say I could try the Business Incorporation route and that I have a could case to convince HMRC I am running a BTL business rather than having a passive BTL investment. However there is no guarantee they will agree. Similarly, simply establishing a formal partnership and waiting 2 years is no guarantee that HMRC will allow me to avoid the SDLT as I would still need to convince them I am running a business rather than having a passive investment. The tax consultancy believe that if I don't try for the SDLT waiver as well as the Business Incorporation I would have a better chance.
If I did go the Business Incorporation route and got HMRC agreement the solution from an IHT perspective would still not be great. The Ltd Company share value would be the equity held in the properties adjusted for the CGT saved. If the business was closed/sold off in the future the CGT would then be payable. If I gave the shares to my daughter she would be receiving a share value which would be equivalent to the value of the properties now for IHT purposes. I could issue growth shares to limit her IHT exposure the the current value of the properties but overall her liability for IHT would still be far to high (also have own property, Private Pension and approx £500k in savings).

Currently I do not draw down from my Personal Pension as I am well above the 40% tax band and could only drawdown about £20-£25k per year. The fund grows more than that so I would never be able to get it lower unless I paid 45% tax. This would obviously be a waste f time as my daughter would only pay 40% tax to inherit the pension.

I've asked the tax consultant for more information about the Director IOU route which is to pay the CGT and SDLT, give my daughter the shares, remain as Director and drawdown income from the company profits against the Directors Loan tax free. Gifting part of the Directors Loan to my Daughter gets over the IHT liability for the Directors Loan. I am awaiting their response.

If I can do what I plan then my taxable income will drop to State Pension. I can then drawdown my Pension more aggressively at the 20% tax rate.

I totally agree that advise on here cannot be  relied on, so far I have paid over £5k for the tax consultant advise and will probably need to pay a further £1.5k to get all the facts I need. 
The reason for posting on here is to share what I plan to do to gauge other peoples reaction, to see if anyone concurs with my view that the Directors Loan can be gifted ahead of hearing back from the consultants and to see if there are any alternative suggestions that I might consider. 

RayMob

[Deleted User] said:

RayMob said:

I have started a review with a tax consultancy firm through my accountant.

Are you happy that the tax consultancy actually has tax professionals in it.  There are lots of instances of accountants getting commission for referrals to dodgy property tax scheme people.

RayMob said:

The tax consultancy believe that if I don't try for the SDLT waiver as well as the Business Incorporation I would have a better chance.

That's a strange thing to say.  

Tax is never certain but the two things are independent.  Do you meet the conditions for CGT relief?  Do you meet the conditions for SDLT relief?  If you don't thing you do meet the conditions for one, you shouldn't try claiming it.  But to say that only claiming one relief will influence HMRC's technical approach to claiming both is just silly.  

RayMob said:

If I did go the Business Incorporation route and got HMRC agreement the solution from an IHT perspective would still not be great.

I think you should ask your adviser about this.  How are you going to get agreement?  My experience and understanding is that HMRC will decline to give a non-statutory clearance on this. 

RayMob said:

I could issue growth shares to limit her IHT exposure the the current value of the properties but overall her liability for IHT would still be far to high (also have own property, Private Pension and approx £500k in savings).

I get worried when people talk about growth shares in relation to property companies as this is what happens in a lot of dodgy schemes.  

My bigger issue with all of this is I have no understanding of what you are commercially trying to achieve. I am quite cynical. Reading all of this it seems that you are trying to "give" your daughter something without really giving her anything.  You give her a loan receivable but the chances are it won't be repaid for donkey years ("I will no the able to withdraw enough income from the Ltd Company to reduce my Direcetors Loan account to zero"). You give her some growth shares and one day she might make a lot of money from them but, well, if you want to you can make sure that she doesn't benefit from them while you are still alive.  So the cynical me says you don't want anything to change other than your IHT bill.  Is that what you want?  

And what does your daughter want?  Why not just give her an unmortgaged property every now and then?  Way simpler if you live seven years.  If she doesn't want the property you can manage it for her until the right time to sell.  But in that case its probably simpler for you just to sell and give her the cash (and live seven years).

RayMob said:

Currently I do not draw down from my Personal Pension as I am well above the 40% tax band and could only drawdown about £20-£25k per year. The fund grows more than that so I would never be able to get it lower unless I paid 45% tax. This would obviously be a waste f time as my daughter would only pay 40% tax to inherit the pension.

40% income tax if you die after age 75 but from 2027 there is IHT on the pension first. So (keeping things simple) 40% IHT and then 40% IT is a 64% marginal rate (actual marginal rate will probably be higher but that will depend on the consultation outcome).

RayMob said:

I totally agree that advise on here cannot be  relied on, so far I have paid over £5k for the tax consultant advise and will probably need to pay a further £1.5k to get all the facts I need. 

That's very cheap for proper advice.

What am I trying to achieve.
To keep receiving an income from my BTL Portfolio and minimise the IHT that my daughter will have to pay. If she receives the Directors Loan without having to pay IHT then she can continue to drawdown the income from the properties without paying tax. She can also sell the properties and reduce her tax liability with the outstanding Directors loan.

Thanks for your comments, but as you have advised: Never trust the stuff written on an internet forum.  It might be completely wrong.

DBdoobydoo

Why no just pay the tax due like the rest of us do? You have built up on enormous property portfolio worth millions by taking advatantage of tax loopholes & now want to evade paying what is due.

RayMob

DBdoobydoo said:

Why no just pay the tax due like the rest of us do? You have built up on enormous property portfolio worth millions by taking advatantage of tax loopholes & now want to evade paying what is due.

I will be paying the tax, Approx £450k in CGT and SDLT to take the properties into a Ltd Company for no real benefit
The only reason for doing so is because the Governments have changed the rules. They have changed the rules for expensing Mortgage Interest for Private Landlords, changed the age for claiming state pension, not keeping the IHT thresholds inline with inflation, deducting £1 from the additional IHT allowance for residential homes for every £2 you go over £1m and changing the rule for making the handing down of Personal Pensions tax free.
These changes are made to make people pay tax earlier rather than hang on to money/assets to be handed down to our families.
Many Private Landlords have moved to a Ltd Company structure paying the CGT and SDLT. Paying more taxes on properties that would previously have not been sold.
Many people will now run down their Personal Pensions instead of leaving them invested. Generating additional income tax and boosting the economy by spending the money.
Many people will hand down money and properties to family early to avoid IHT. Boosting the economy by spending money now. 

All I am seeking to do is to play within their rues to minimise the amount of IHT that will need to be paid.
No doubt the goal posts will be moved again in the future and people will need to change their plans again.

SiliconChip

The question which you haven't addressed anywhere in the thread is whether your daughter actually wants to run a property business at some indeterminate point in the future. If she already has a career, or is a homemaker, or just has better things to do with her time, perhaps she would have no interest at all in the complications of letting, maintaining, buying and selling multiple properties. If it's not what she sees herself doing then I'd agree with a previous post that you'd be better to sell up, give her the money, and do your best to survive for 7 years.