HMRC has issued the stop notice regarding the “Capital Account Restructuring Scheme" promoted by Property118. Under this scheme property business owners transfer their business into a company while managing existing debts and financial obligations.
Property118’s Tax Scheme
Their Scheme can be enumerated as under:
Initial Bridging Finance Agreement
The property business owners (individuals or partners) get a short-term loan (bridging finance) from a third-party lender for the property business.
Facility Agreement
The business owners, their newly formed limited company (where they are directors), and the lender enter into a facility agreement. The amount provided to the property business is to extract the capital from the business before the business is officially moved into the new company.
The new company will take on the responsibility for this bridging loan after the business assets and liabilities are transferred. However, the existing mortgages on the properties stay with the original owners.
A fee is charged for using this loan, and it must be repaid shortly after it’s received. The owners ensure that this new loan doesn’t violate any of their current borrowing agreements.
Loan Drawdown
The individuals draw down the bridging loan.
Sale and Purchase Agreement
The property business is sold to the new company in exchange for shares. This sale includes all assets and liabilities of the business.
The agreement includes details about the properties, mortgage liabilities, and the bridging loan.
Additional agreements (Trust Deed, Agency Agreement, Contract for Sale) are made to manage the relationship between the business owners and the company after the transfer.
Importantly, the existing mortgage liabilities are not transferred to the company; instead, the company agrees to service these mortgages.
Trust Deed
The business owners (as trustees) hold the legal interest in the properties on behalf of the company (the beneficiary).
Agency Agreement
The business owners act as agents for the company to make mortgage payments and handle other financial transactions related to the properties held in trust.
Contract for Sale
The business owners agree to sell the properties to the company with a full title guarantee. The actual legal transfer of the property title will happen 28 days after the company decides to complete the sale.
Business Transfer Completion
The business is now effectively transferred to the company, which holds the beneficial interest in the properties and is responsible for the mortgages and the bridging loan.
Repayment of Bridging Loan
The business owners (as directors) loan the amount of the bridging loan to the company. The company uses this money to repay the bridging loan.
This eliminates the bridging loan, and the directors get a credit in their loan account, which they can draw from tax-free.
Conclusion
This is one of the cases that highlights just how important it is to understand how the tax laws in the UK work. There are quite a few schemes that are available to help ease the burden of taxpayers, residents and non-residents, alike. However, using non intended means to avoid taxes is just another way to have the taxman running after you.
Always consult with tax experts and get confirmation on what schemes have been made available for you by the government. Needing to pay less taxes is great news, as long as the taxman doesn’t hit you with more penalties.
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