We have inherited a property portfolio – what next?

Dear Steve

I will begin by offering my condolences to your family, and saying that your father-in-law must a been a very wise man to have thought through and planned in the way he has.

The overview you have provided is very comprehensive, so thank you for that. Without a full fact-find, I cannot advise you formally, but the following are my initial thoughts:-

1. £52,000 of taxable rental income would mean that your wife would immediately fall into the higher rate tax band. She will not be affected by the Section 24 restrictions on finance cost relief at this stage because the property business has no debt secured against it. However, since you have stated that it is the intention to develop the business, it may well be that borrowing against the security of the properties is possible.

2. An opportunity exists for your wife to gift beneficial interest in the properties to your daughters. As these gifts would be deemed as zero consideration (based on the fact there are currently no mortgages) there would be no Stamp Duty or SDLT due at this stage. Providing your wife survives the gifts by seven years there will be no IHT payable either.

3. Assuming the gifts described above are made, joint ownership will exist. Given the size of the property portfolio and the plans to expand it I believe this would automatically qualify as a business based on the Partnership act 1890.

4. My recommendation would be to draw up a partnership agreement, open a partnership bank account and register the property rental business as a partnership with HMRC.

5. The advantage of 4. above is that partnerships can allocate profits disproportionately to ownership.

6. It seems logical to allocate at least £11,850 of the partnership profits to each of your daughters, especially whilst they are not earning whilst attending university. This would reduce the taxable income of your wife to a figure well below the higher rate tax threshold. Also, by using their nil rate tax allowances your daughters would pay no tax at all at this level.

7. If the business does take on additional borrowing and profits from the newly acquired profits begin to push your wife into the higher rate tax bracket again, the business could compensate for this by increasing the profit allocation to your daughters. The outcome of this is that your daughters would pay only 20% tax on their share of profit allocation and your wife could keep her taxable income below the higher rate of tax for quite some time on this basis.

8. Note that allocated profit is very different to drawings. Your wife could, if she wanted to, continue to withdraw 100% of the available cash from the business. This would effectively reduce the value of her partnership capital account whilst the polar opposite occurs to the value of the capital accounts of your daughters. This, in itself, is a useful IHT planning opportunity.

9. If the business reaches a point whereby the profits exceed all of the partners basic rate tax allowances combined, then there are two options. The first would be to form a management company and appoint that as a partner in the business, the second would be to consider incorporation of the business.

10. I will not over-complicate this response by going into detail in regards to the structures mentioned in 9. above, because they are not relevant to your immediate requirements. However, if you would like to consider these structures now, perhaps with a view to building a longer term strategy, I recommend the online PowerPoint Presentation by Cotswold Barristers, which I have linked here.

As I explained at the top of this post, you must not regard any of the above as advice at this stage. The way I work is to complete a full fact-find, then prepare a report and recommendations on which I obtain Counsel’s Opinion for you.
If Counsel agrees with my recommendations he will adopt that as his own professional advice subject to you agreeing to instruct him to deal with the legal work associated with implementation. Please note that unlike solicitors’ firms and accountants, who can hide behind limited liability, all barristers can only be self-employed, hence they are personally responsible for the advice they provide. Naturally, they purchase professional indemnity insurance for the protection of themselves and their clients, but in effect they personally guarantee the advice they are giving to you. This is why we always recommend obtaining Counsel’s Opinion.

The fee I charge for the consultation service I have described above, inclusive of Counsel’s opinion, is just £400. If you would like to book a consultation please see our main Tax page, linked here.

We can also assist you with similar estate planning to that which your father-in-law had organised, please see https://www.property118.com/iht-legacy-planning-landlords-case-study/

All the best

Mark Alexander – founder of Property118 “The Landlords Union”

Mark

Thank you for your very detailed response and I hope you don't think I was being a cheapskate by posting an article on the forum instead of paying for a consultation. In my own defense, I didn't know what I would be getting for my money, but I can see now why a consultation with you should be worth every penny of the £400 fee you charge so thank you for that, we will be in touch. Before we do though, please can you give me some idea of what it would cost to implement the structure you have recommended, without cutting any corners, because we need to get this right from the start. We feel like guardians of my father-in-law's legacy and want to grow the business to something he would have been proud of. Our daughters were not particularly interested in getting involved, but I think that could all change when they read this thread. Thanks again.

Reply to the comment left by Steve at 01/08/2018 - 14:03
Hi Steve

I am very happy to respond to well written "readers questions" because it provides an opportunity to showcase the level of detail we go into in a consultation and the results we can help people to achieve.

Your critique in regards to knowing what you might get for your £400 consultation fee is fair. That's another reason we like to respond to case studies like this one, and it is also why every consultation comes with a guarantee of total satisfaction or a full refund.

In regards to your question about costs, the following is the legal work necessary to set this up properly:-

1) Deeds of Gift or Declarations of Trust to transfer beneficial interest to your daughters and dealing with the associated £nil Stamp Duty Land Tax returns

2) Drafting of the partnership agreement to clearly document the business requirements whilst retaining maximum flexibility

3) Registration of the partnership with HMRC

I would envisage the fees for the above, for a business of the size we have been talking about, to be circa £5,000 + VAT.

You would also need to give the business a trading name, open a business bank account and I would also recommend you to have business stationery and email addresses.

I look forward to receiving your consultation booking confirmation.

The most important thing to realaise is that making money in the good times is not difficult but in the bad times avoiding going broke is paramount.
You do not need £10,000,000 but a few thousand a month is very useful.

Mark, can you clarify why it’s important to have the additional operating expenses of business bank accounts, email addresses and stationery? Is it just to “evidence” the business operations if HMRC were to challenge you?

My husband and I try to avoid unnecessary expenses that don’t actually add anything in terms of profitability, so don’t currently use a business account for our partnership. I note that your checklist of whether we’d qualify as a business for incorporation relief discounted us on this fact when our accountant states there is no question that we are operating as a business.

Reply to the comment left by Kate Mellor at 04/08/2018 - 20:25
Hi Kate

You are not compelled by law to have any of these things, however, I’m all for an easy life.

Imagine the conversation with a tax inspector. Business banking can be free if you shop around and stationery and an email address are all available for less than £50 too. It’s all about perceptions.