Ronnie Ludwig

Ronnie Ludwig, tax expert and chairman of Grant Property, said: “In certain circumstances, those who are either self employed in partnerships or who have private family trading companies may still be able to obtain top rate tax relief on the interest payments by skillfully converting the debt.

“If we take the example of a married couple where the husband owns shares in a successful private family trading company and his wife has a successful career working elsewhere. They have a buy-to-let Property with a £100,000 mortgage the interest on which, until recently, attracted higher rate tax relief but is now restricted to 20%.

“The husband could consider paying off the mortgage by selling £100,000 worth of shares in the family company to his wife who would borrow the money to do so from the bank. The husband would then pay off the tax inefficient mortgage and his wife would obtain top rate tax relief on the interest relating to the £100,000 that she has borrowed because those borrowings are for a qualifying business purpose, acquisition of shares in an unquoted trading company. The level of debt remains identical, but the manner in which it is structured converts it from being relatively tax inefficient to being fully tax efficient.

“There would be no Capital Gains Tax liability arising on the husband because the inter spouse Capital Gains Tax exemption would apply. His wife would be deemed to have acquired the shares at his original base cost for future CGT purposes. For technical tax reasons the shares should be sold to the wife at a 10% to 20% discount. “

Those in partnerships who have surplus capital in the partnership accounts may find themselves in a similar beneficial position.

Ludwig explains: “Often surplus capital arises in partnership accounts simply because partnership property, for example, has been revalued. This does not necessarily mean that the partnership can afford to pay out the surplus, usually because the cash is not sitting in the bank, however it does open up significant tax planning opportunities.

“For example, where this situation arises the partner in question could withdraw the surplus capital from the partnership and use this to pay off his tax inefficient mortgage, and immediately replace the capital in the firm with bank borrowings of an identical amount.

“Again the level of debt concerned is identical, but the tax result is very different and the partner should obtain tax relief on the interest relative to the borrowings at his marginal rate.

“The order in which the various steps are taken is crucial to the success of this tax planning manoeuvre and the correct paperwork, partnership minutes, must be in place.

“It is important that professional advice is taken prior to any of the above steps being implemented as there are numerous potential pitfalls which could result in complete denial of the relief.”