Skip to content
Spotlight
Accountancy

£4.5m Property Portfolio Incorporation, Creating Big Tax Savings

The Background

Imagine spending 20 years meticulously building and managing a property portfolio, only to find that the taxman is taking a bigger slice of your profits than ever before. That was the situation faced by our clients, who had amassed a 22-property portfolio across South West London, valued at around £4.5 million. The properties generated a healthy annual income of £225,000, but thanks to the location and market growth over two decades, they also had significant capital gains attached to them.

Each of these properties was saddled with an individual residential mortgage, each with different terms and rates. Our clients had no other employment, dedicating all their time to managing these properties.

Key Information

  • Portfolio: 22 properties owned in personal names

  • Annual Income: £225,000

  • Portfolio Value: £4.5 million

  • Mortgage Structure: 22 separate individual mortgages

The Problem

While the portfolio was undoubtedly a success story, it came with a hefty tax bill. The income generated from the properties pushed our clients into the higher tax bracket. And to make matters worse, recent changes to how mortgage interest relief is calculated meant that they were losing out on significant tax relief on their finance costs.

Selling off some properties to reduce debt wasn’t a viable option either. Doing so would have triggered substantial capital gains tax liabilities, eating into the profits. On top of this, the lack of a clear succession plan posed long-term challenges, particularly around inheritance tax.

The Solution

Given that our clients were effectively running this portfolio as a business, we proposed incorporating it into a limited company. But before jumping into incorporation, the first step was to run the portfolio as a partnership for two years. This step was crucial because, after this period, we could transfer the portfolio to a limited company without triggering capital gains tax. This process is known as incorporation relief, where the gains are effectively rolled into the share value of the new company.

However, incorporation alone wasn’t enough. The portfolio’s mortgage structure—22 separate mortgages with different lenders—was another headache that needed fixing. That’s where our capital advisory team at P10 Financial Group came in. They worked on refinancing the entire portfolio, consolidating all 22 mortgages into one collateralized loan with a single lender. This not only slashed the interest rates significantly but also made the portfolio far easier to manage.

Incorporation also offered a tax advantage: mortgage interest is fully tax-deductible for limited companies. Our clients could now benefit from full tax relief on their finance costs. Since they don’t plan to withdraw all the profits from the company, they have the flexibility to optimize their income tax position, saving an estimated £20,000 annually.

Additionally, because the properties were transferred to the company at their current market value, the company can sell properties in the future without incurring substantial capital gains, providing further options to reduce borrowing or reinvest in new opportunities.

Perhaps most importantly, by holding shares rather than direct property ownership, our clients have opened the door to more effective succession planning. This restructuring will help reduce their overall exposure to inheritance tax—a long-term benefit that, while not immediately tangible, could save their estate from a 40% tax hit in the future.

Conclusion

By working with our tax and capital advisory teams, our clients achieved significant savings and set themselves up for long-term financial success. They’ve not only reduced their tax burden and interest costs but also gained flexibility for future property transactions and created a clear succession plan. It’s a prime example of how strategic planning can turn a tax nightmare into a financial victory.