CHOOSING THE RIGHT STRUCTURE
As specialists in property taxation, we can help you determine which ownership structure will be the most tax-efficient for your investment property portfolio. The most frequently used are partnership, limited company, direct ownership and trusts.
Direct ownership can be the simplest option in terms of legal matters and paperwork, although it’s most advantageous if it is for your personal use, rather than a portfolio of multiple properties. There is no Annual Tax on Enveloped Dwellings (ATED) and you could reduce Capital Gains Tax (CGT), particularly where the property is, or has been, your main residence.
Trust or corporate structures do have their advantages in certain circumstances. If you’re buying properties to rent them out, holding them in a company means you will pay corporate tax, at a lower rate than income tax. If tax is not your only concern, a trust may prove more helpful with estate planning, asset protection and confidentiality.
KEEPING IT IN THE FAMILY
Taking a long-term view and creating a portfolio to benefit your family can be one of the most tax-efficient routes to owning property, reducing your exposure to IHT and income tax. For example, by setting up a t company with your family as shareholders, you can reduce the tax payable by using the personal allowances and lower tax bands of family members who earn less than you. You can use the dividend allowance when you pay dividends, and it is easier to transfer shares in the company to family members rather than having a number of family members owning the same property directly. This provides the opportunity to undertake IHT planning and reduce the IHT payable on your estate.
The drawback is that this structure is most tax efficient if the majority of the profits and gains are kept within the company to benefit younger family members, as there’s a potential double tax charge when you take income from the company, particularly following a property sale. If the income is likely to attract higher tax rates or you’re thinking of selling a property from your portfolio, we suggest you talk to us first.
TAX TRAPS TO LOOK OUT FOR
We’ll explain the latest rules on allowable deductions against your rental income profits, to ensure you claim all the expenses available to you. At the same time, we’ll tell you which deductions are restricted or no longer available.
You may already know there can be Capital Gains Tax (CGT) implications if you dispose of an investment property. However, you might not be aware that the rate of tax remains higher than for other types of asset. We can help you plan for this liability by highlighting any potential reliefs available and advising on the optimum timing for disposal. Additionally, you may be able to save on CGT by transferring the property to your spouse if they are in a lower tax band. Provided the property is not mortgaged and you are not gaining financially from the transfer, there is no exposure to stamp taxes including Land and Buildings Transaction Tax (LBTT).
An often overlooked tax connected with investment properties is (LBTT). Taking our advice early, so you fully understand the implications of the LBTT rules, can help you avoid unintended adverse tax charges on the purchase of investment properties.
MAXIMISING YOUR PROPERTY INCOME
If you’re buying properties to rent them out, setting up a limited company means you will pay corporate tax, at a lower rate than income tax. We can advise on the available tax reliefs and claims available, to increase your post tax income.
For example, if you are renting your properties, tax on your rental profits can be reduced by claiming expenses for repairs (but not improvements), deducting mortgage interest if applicable, claiming for use of your home as your office and use of your car in relation to managing the properties.
Finally, if you have had your rental properties for some time, consider having them revalued. They many well have gained in value, which could be good news if you’ve mortgaged your properties when acquiring them to build your portfolio. A higher value will reduce the loan to value and may qualify you for a lower interest rate and less outlay.