3 Houses & 2 Companies, split into 2. Can it be done fairly?
Discussion
Hello all,
After some advice as I suspect this is an issue that could could a big rift in the family. It is already causing me angst over and above our recent familial issues I've discussed in SP&L.
I'm sorry this is a long post and I've tried to describe the situation to the best of my ability. Please ask if further clarification is needed.
Long and the short of it:
- 3 houses, ~£1.2M value each. All the same size (4 bed terrace).
- Owned equally by two brothers (Bro1 & Bro2) via companies
- They want to pass them on to their children, each has two children. It is thought that the children of each will own jointly, so essentially wanting to split the 3 houses into 2.
- Brothers have two companies. One is UK based and owns two of the houses (A and B), the other company is offshore and owns the other (C).
- Houses A and B need quite a bit of work (at least 100k) to get them up to standard but have notable potential as they are next door to each other and have extension potential into the basement. I believe they are set up as HMOs
- House C is in decent condition and ready to rent out. It is not an HMO at present.
Re houses A and B: It is reported that for each brother to make a transfer of their shares to their children, it will incur significant capital gains tax (330k each). So, to split and transfer to both Bro1 and Bro2's children (50% each) it would be ~ 660k total.
Re house C: as it is owned by an offshore company, the rules of that country mean that transfer can occur for minimal amounts (admin fees etc).
PROPOSAL 1
This is the one currently on the table and debated.
Property A&B: Bro1 would take the financial hit of the CGT payment for A and B. Bro2 would gift his shares to Bro1 and these would be transferred to Bro1's children. Bro1 would have 50% of the company (as before) and Bro1's children would have the other 50%. A&B would owned by Bro1 and his children.
Property C: Bro2 would be gifted Bro1's shares in the offshore company so Bro 2 has 100%. These could be transferred to Bro2's children (as mentioned for minimal amounts). Bro's 2 children would own 100% of C.
Essentially:
Bro1's children end up with property A&B but have to pay a 330k bill
Bro2's children end up with property C and minimal/no bills.
PROPOSAL 2
Bro1 and Bro2 split A&B evenly and get a 660k bill.
Bro1 and Bro2 split C evenly and no tax bill.
The headline for me in Proposal 1 is - Bro1 pays 330k and gets 2.4M of property whereas Bro2 pays nothing and gets 1.2M of property.
Questions:
- Is the situation re the CGT payment actually correct? Is there no way of working a transfer without such a heavy financial penalty? Are there other ways of dealing with this situation?
- Would Bro2 be a mug to accept Proposal 1 for his children?
- Is Proposal 2 viable? Could a loan be taken against the business to pay the 660k and everything is even
Alternatively, one goes along with Proposal 1 and Bro1 pays Bro2 a decent amount on top to 'compensate' for the property inequity?
I am really interested to hear your informed and much more knowledgeable opinions. As ever, any input is gratefully appreciated.
After some advice as I suspect this is an issue that could could a big rift in the family. It is already causing me angst over and above our recent familial issues I've discussed in SP&L.
I'm sorry this is a long post and I've tried to describe the situation to the best of my ability. Please ask if further clarification is needed.
Long and the short of it:
- 3 houses, ~£1.2M value each. All the same size (4 bed terrace).
- Owned equally by two brothers (Bro1 & Bro2) via companies
- They want to pass them on to their children, each has two children. It is thought that the children of each will own jointly, so essentially wanting to split the 3 houses into 2.
- Brothers have two companies. One is UK based and owns two of the houses (A and B), the other company is offshore and owns the other (C).
- Houses A and B need quite a bit of work (at least 100k) to get them up to standard but have notable potential as they are next door to each other and have extension potential into the basement. I believe they are set up as HMOs
- House C is in decent condition and ready to rent out. It is not an HMO at present.
Re houses A and B: It is reported that for each brother to make a transfer of their shares to their children, it will incur significant capital gains tax (330k each). So, to split and transfer to both Bro1 and Bro2's children (50% each) it would be ~ 660k total.
Re house C: as it is owned by an offshore company, the rules of that country mean that transfer can occur for minimal amounts (admin fees etc).
PROPOSAL 1
This is the one currently on the table and debated.
Property A&B: Bro1 would take the financial hit of the CGT payment for A and B. Bro2 would gift his shares to Bro1 and these would be transferred to Bro1's children. Bro1 would have 50% of the company (as before) and Bro1's children would have the other 50%. A&B would owned by Bro1 and his children.
Property C: Bro2 would be gifted Bro1's shares in the offshore company so Bro 2 has 100%. These could be transferred to Bro2's children (as mentioned for minimal amounts). Bro's 2 children would own 100% of C.
Essentially:
Bro1's children end up with property A&B but have to pay a 330k bill
Bro2's children end up with property C and minimal/no bills.
PROPOSAL 2
Bro1 and Bro2 split A&B evenly and get a 660k bill.
Bro1 and Bro2 split C evenly and no tax bill.
The headline for me in Proposal 1 is - Bro1 pays 330k and gets 2.4M of property whereas Bro2 pays nothing and gets 1.2M of property.
Questions:
- Is the situation re the CGT payment actually correct? Is there no way of working a transfer without such a heavy financial penalty? Are there other ways of dealing with this situation?
- Would Bro2 be a mug to accept Proposal 1 for his children?
- Is Proposal 2 viable? Could a loan be taken against the business to pay the 660k and everything is even
Alternatively, one goes along with Proposal 1 and Bro1 pays Bro2 a decent amount on top to 'compensate' for the property inequity?
I am really interested to hear your informed and much more knowledgeable opinions. As ever, any input is gratefully appreciated.
Gift Hold Over Relief is usually available to circumvent the capital gain issue.......but you have an immediate snag. Your Companies are not trading, they are investment companies.
If Alpinestars falls out the pub in time and Man Utd have beaten some non-descript soccer team he may be able to think of a workaround.
If Alpinestars falls out the pub in time and Man Utd have beaten some non-descript soccer team he may be able to think of a workaround.
Yes, it's a tricky one that means big bills.
Is one even allowed to take a loan against a business to pay a Capital Gains Tax bill? I'm not sure if there's a work around. As mentioned, I can only go with the information presented to me.
Bro1 states he can locate the money and is keen to proceed with Proposal 1, but of course his part of the family will benefit from 2 properties whereas Bro2 will end up with only 1.
I know this all sounds a but 'first world problems' but I'm v concerned how it will affect the relationships in the family if there is the feeling of inequity in the split.
Is one even allowed to take a loan against a business to pay a Capital Gains Tax bill? I'm not sure if there's a work around. As mentioned, I can only go with the information presented to me.
Bro1 states he can locate the money and is keen to proceed with Proposal 1, but of course his part of the family will benefit from 2 properties whereas Bro2 will end up with only 1.
I know this all sounds a but 'first world problems' but I'm v concerned how it will affect the relationships in the family if there is the feeling of inequity in the split.
Set up an LLP,
As long as everyone is fit and well, and 50/50 owned (at present)....
LLP members could be the two ltd co's and the two brothers and children, so 8 in total.
Channel the rents via LLP, and distribute profits/drawings as seen fit, between "human" members and corporate.
The 2 brothers could set up a life policy to cover the transfer in shares (upon death, no CGT in death only IHT), or even better the children (or the LLP) borrow the funds now to repay the brothers.
No need to start moving things about paying CGT and or Stamp, unless that is that it would be beneficial (and sometimes it is).
As long as everyone is fit and well, and 50/50 owned (at present)....
LLP members could be the two ltd co's and the two brothers and children, so 8 in total.
Channel the rents via LLP, and distribute profits/drawings as seen fit, between "human" members and corporate.
The 2 brothers could set up a life policy to cover the transfer in shares (upon death, no CGT in death only IHT), or even better the children (or the LLP) borrow the funds now to repay the brothers.
No need to start moving things about paying CGT and or Stamp, unless that is that it would be beneficial (and sometimes it is).
Deesee said:
Set up an LLP,
As long as everyone is fit and well, and 50/50 owned (at present)....
LLP members could be the two ltd co's and the two brothers and children, so 8 in total.
Channel the rents via LLP, and distribute profits/drawings as seen fit, between "human" members and corporate.
The 2 brothers could set up a life policy to cover the transfer in shares (upon death, no CGT in death only IHT), or even better the children (or the LLP) borrow the funds now to repay the brothers.
No need to start moving things about paying CGT and or Stamp, unless that is that it would be beneficial (and sometimes it is).
Deesee, thank you for taking the time to reply. It's all very complicated.As long as everyone is fit and well, and 50/50 owned (at present)....
LLP members could be the two ltd co's and the two brothers and children, so 8 in total.
Channel the rents via LLP, and distribute profits/drawings as seen fit, between "human" members and corporate.
The 2 brothers could set up a life policy to cover the transfer in shares (upon death, no CGT in death only IHT), or even better the children (or the LLP) borrow the funds now to repay the brothers.
No need to start moving things about paying CGT and or Stamp, unless that is that it would be beneficial (and sometimes it is).
Your suggestion is very interesting and certainly something worth exploring.
Can that still work with one company being based offshore?
It is certainly interesting that the only option put on the table so far that allows to transfer to all 4 kids is burdened by a 660k bill.
I've mentioned 'Proposal 1' with the share transfer and 330k CGT bill for Bro1. Could it be possible that Bro1 could actually set up an LLP as you've mentioned above comprising the current company that owns House A & B, himself and his 2 children and so in doing actually avoid CGT (and still get ownership of Property A&B)?
Bro1 is the one who has suggested the Proposal, but of course he (& his kids) benefit from getting 2 properties (versus 1). I am wary (and feel v bad saying so) that Bro1 is spinning a yarn re CGT to 'force' Bro2's hand in accepting the reported Proposal because Bro2 doesn't have the 330k to pay the bill (when in actual fact the LLP idea could = zero CGT + ownership of the properties)?
Appreciate any thoughts/opinions.
You need expensive professional advice if you are going to set up complicated structures. You don't want to stray from sensible tax planning (avoidance) to illegal evasion.
Nor do you want a carefully set up avoidance scheme to be struck down later by HMRC. They have the power to do this.
Advice on a non-specialist forum is not what you need.
Nor do you want a carefully set up avoidance scheme to be struck down later by HMRC. They have the power to do this.
Advice on a non-specialist forum is not what you need.
Eric Mc said:
You need expensive professional advice if you are going to set up complicated structures. You don't want to stray from sensible tax planning (avoidance) to illegal evasion.
Nor do you want a carefully set up avoidance scheme to be struck down later by HMRC. They have the power to do this.
Advice on a non-specialist forum is not what you need.
I understand Eric and agree that to proceed it any way would require proper pro input. Nor do you want a carefully set up avoidance scheme to be struck down later by HMRC. They have the power to do this.
Advice on a non-specialist forum is not what you need.
However, I'm just wanting to get an idea as to:
1) Whether the proposal is legit (and not being sold a pup), i.e. is the CGT story actually the case and not a feigned 'self sacrifice' with a view to getting the 2 properties.
2) Whether other avenues exist that would reduce the tax burden (whether in the short or long term).
I am ignorant and we're fortunate to have knowledgeable people here. If I can go into conversations with the Bros or Pros with a better understanding of the options, I think it'd be beneficial.
You are asking for answers to a complex set up on a non-specialist forum. It is a dangerous route to go because even I, as an accountant who runs my own practice, would not go anywhere near such a complex scheme.
The people who can answer your questions properly will need to be paid for their knowledge I'm afraid.
The people who can answer your questions properly will need to be paid for their knowledge I'm afraid.
g3org3y said:
Deesee said:
Set up an LLP,
As long as everyone is fit and well, and 50/50 owned (at present)....
LLP members could be the two ltd co's and the two brothers and children, so 8 in total.
Channel the rents via LLP, and distribute profits/drawings as seen fit, between "human" members and corporate.
The 2 brothers could set up a life policy to cover the transfer in shares (upon death, no CGT in death only IHT), or even better the children (or the LLP) borrow the funds now to repay the brothers.
No need to start moving things about paying CGT and or Stamp, unless that is that it would be beneficial (and sometimes it is).
Deesee, thank you for taking the time to reply. It's all very complicated.As long as everyone is fit and well, and 50/50 owned (at present)....
LLP members could be the two ltd co's and the two brothers and children, so 8 in total.
Channel the rents via LLP, and distribute profits/drawings as seen fit, between "human" members and corporate.
The 2 brothers could set up a life policy to cover the transfer in shares (upon death, no CGT in death only IHT), or even better the children (or the LLP) borrow the funds now to repay the brothers.
No need to start moving things about paying CGT and or Stamp, unless that is that it would be beneficial (and sometimes it is).
Your suggestion is very interesting and certainly something worth exploring.
Can that still work with one company being based offshore?
“Yes”
It is certainly interesting that the only option put on the table so far that allows to transfer to all 4 kids is burdened by a 660k bill.
“Seems like someone could be using leverage? I have cash and you don’t, why pay tax when you don’t need too”.
I've mentioned 'Proposal 1' with the share transfer and 330k CGT bill for Bro1. Could it be possible that Bro1 could actually set up an LLP as you've mentioned above comprising the current company that owns House A & B, himself and his 2 children and so in doing actually avoid CGT (and still get ownership of Property A&B)?
“Yes but brother two owns 50% of each company. Ownership of the properties is in company names correct?”
Bro1 is the one who has suggested the Proposal, but of course he (& his kids) benefit from getting 2 properties (versus 1). I am wary (and feel v bad saying so) that Bro1 is spinning a yarn re CGT to 'force' Bro2's hand in accepting the reported Proposal because Bro2 doesn't have the 330k to pay the bill (when in actual fact the LLP idea could = zero CGT + ownership of the properties)?
“If brother 2 does own 50% of the companies then he has 50% of the gains and 50% of voting rights etc (assuming a straight forward companies arrangement).”
Appreciate any thoughts/opinions.
Eric Mc said:
You need expensive professional advice if you are going to set up complicated structures. You don't want to stray from sensible tax planning (avoidance) to illegal evasion.
Nor do you want a carefully set up avoidance scheme to be struck down later by HMRC. They have the power to do this.
Advice on a non-specialist forum is not what you need.
Some one has asked a theorical question, and others have given some insight.Nor do you want a carefully set up avoidance scheme to be struck down later by HMRC. They have the power to do this.
Advice on a non-specialist forum is not what you need.
No one has suggested complicated structures and certainly not illegal tax schemes, infact one of the companies is already “off shore”.
Me I do this for a living, with everything HMRC approved thanks.
Not wanting to go into a full fact find here but giving a short insight into how it could work and save 600k in perhaps unnecessary tax through transfers that might not need to happen.
Eric Mc said:
You are asking for answers to a complex set up on a non-specialist forum. It is a dangerous route to go because even I, as an accountant who runs my own practice, would not go anywhere near such a complex scheme.
The people who can answer your questions properly will need to be paid for their knowledge I'm afraid.
So I guess your saying you have no professional landlords that you help, with company structures, IHT/succession planning, to maximise returns and minimise tax payable?The people who can answer your questions properly will need to be paid for their knowledge I'm afraid.
Deesee said:
g3org3y said:
Deesee said:
Set up an LLP,
As long as everyone is fit and well, and 50/50 owned (at present)....
LLP members could be the two ltd co's and the two brothers and children, so 8 in total.
Channel the rents via LLP, and distribute profits/drawings as seen fit, between "human" members and corporate.
The 2 brothers could set up a life policy to cover the transfer in shares (upon death, no CGT in death only IHT), or even better the children (or the LLP) borrow the funds now to repay the brothers.
No need to start moving things about paying CGT and or Stamp, unless that is that it would be beneficial (and sometimes it is).
Deesee, thank you for taking the time to reply. It's all very complicated.As long as everyone is fit and well, and 50/50 owned (at present)....
LLP members could be the two ltd co's and the two brothers and children, so 8 in total.
Channel the rents via LLP, and distribute profits/drawings as seen fit, between "human" members and corporate.
The 2 brothers could set up a life policy to cover the transfer in shares (upon death, no CGT in death only IHT), or even better the children (or the LLP) borrow the funds now to repay the brothers.
No need to start moving things about paying CGT and or Stamp, unless that is that it would be beneficial (and sometimes it is).
Your suggestion is very interesting and certainly something worth exploring.
Can that still work with one company being based offshore?
“Yes”
It is certainly interesting that the only option put on the table so far that allows to transfer to all 4 kids is burdened by a 660k bill.
“Seems like someone could be using leverage? I have cash and you don’t, why pay tax when you don’t need too”.
I've mentioned 'Proposal 1' with the share transfer and 330k CGT bill for Bro1. Could it be possible that Bro1 could actually set up an LLP as you've mentioned above comprising the current company that owns House A & B, himself and his 2 children and so in doing actually avoid CGT (and still get ownership of Property A&B)?
“Yes but brother two owns 50% of each company. Ownership of the properties is in company names correct?”
Bro1 is the one who has suggested the Proposal, but of course he (& his kids) benefit from getting 2 properties (versus 1). I am wary (and feel v bad saying so) that Bro1 is spinning a yarn re CGT to 'force' Bro2's hand in accepting the reported Proposal because Bro2 doesn't have the 330k to pay the bill (when in actual fact the LLP idea could = zero CGT + ownership of the properties)?
“If brother 2 does own 50% of the companies then he has 50% of the gains and 50% of voting rights etc (assuming a straight forward companies arrangement).”
Appreciate any thoughts/opinions.
"If we want to split things, this is the best option. I'll take the CGT hit (but take two properties)"
To answer your question: Bro1 & 2 own 50% of each company. Yes, the properties are in the company names.
I get the feeling that a clean break between the Bros is ultimately what is desired (which is a shame) and let each set of kids go their separate way. If that is indeed the case, is Bro1's CGT proposal legit? I know Bro2 doesn't have the ££ to pay any CGT bills when it comes to share transfer to his children (for Property A&B).
My personal opinion was that this option could be considered reasonable (if no other work around exists) but Bro1 should also be paying Bro2 some cash to balance things out:
Bro1 & Kids = 1.2M+1.2M-330k = 2.1M
Bro2 & Kids = 1.2M +£???K
Without additional cash, I can't see how there won't be resentment on Bro2's side.
Deesee said:
Eric Mc said:
You are asking for answers to a complex set up on a non-specialist forum. It is a dangerous route to go because even I, as an accountant who runs my own practice, would not go anywhere near such a complex scheme.
The people who can answer your questions properly will need to be paid for their knowledge I'm afraid.
So I guess your saying you have no professional landlords that you help, with company structures, IHT/succession planning, to maximise returns and minimise tax payable?The people who can answer your questions properly will need to be paid for their knowledge I'm afraid.
The complex answer is the one I have already given - if one wants complex tax planning, one should be prepared to pay for it.
Deesee said:
Eric Mc said:
You need expensive professional advice if you are going to set up complicated structures. You don't want to stray from sensible tax planning (avoidance) to illegal evasion.
Nor do you want a carefully set up avoidance scheme to be struck down later by HMRC. They have the power to do this.
Advice on a non-specialist forum is not what you need.
Some one has asked a theorical question, and others have given some insight.Nor do you want a carefully set up avoidance scheme to be struck down later by HMRC. They have the power to do this.
Advice on a non-specialist forum is not what you need.
No one has suggested complicated structures and certainly not illegal tax schemes, infact one of the companies is already “off shore”.
Me I do this for a living, with everything HMRC approved thanks.
Not wanting to go into a full fact find here but giving a short insight into how it could work and save 600k in perhaps unnecessary tax through transfers that might not need to happen.
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