Do you own investment property and want to find out more about the best ways to own them and minimise tax ?
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Investment Property Structures
Investing in property is one of the best ways of generating income and capital growth; and since the 1980s more people than ever have chosen to buy residential Buy-to-Let. The market is booming, and lots of us are seeing it as an attractive alternative to pensions and general wealth creation.
Whilst many people have significantly increased their net worth, few have taken or received joined up professional advice as how to balance the contradictory demands of Capital Gains Tax (CGT), Corporation Tax (CT), Inheritance Tax (IHT), Stamp Duty (SDLT) and Income Tax, which is why structure is such an important subject and even comes before finding the money.
By way of example; a BTL owning client was concerned about the amount of taxes they were paying and the size of their IHT bill. Over the years the client had done what, on the surface at least, was the right thing by making themselves wealthier by amassing an unmortgaged fifty-strong investment property estate now worth something in the region of £18m.
The downside was that to allegedly save income tax and professional fees, the husband and wife team had bought the properties in their joint names and, whilst passing to her IHT free when he died some three years ago, their children face an IHT bill north of £7m when mum passes away! Not every client has the same huge problem, but ‘accidental’ landlords (most of us are) are not being given enough advice at the outset.
How you own your investment property portfolio directly affects not just the amount of tax you pay today, but what you’ll have to pay whilst you own it (income or corporation tax), what you’ll pay when you come to sell it (capital gains or corporation tax), and finally IHT when you pass it on either during your lifetime or when you die. If you get the structures wrong, the government will end up making as much money out of your investments as you do!
The main ways to own BTLs are personal/partnership ownership as joint tenants (the default) or as tenants in common, via a trust, an investment company, trading company, a hybrid vehicle or, for very few, a UK tax exempt company.
There’s no one right answer as to which structure will best suit, and the decision as to which one to use should be made with reference to your overall goals, taxation and commercial issues. In which regard, the decision as to own BTLs personally or via a company depends on the detail and no two cases are alike.
If you personally own one or two properties as a current investment and intend to dispose of them in the short to medium term, then it’s probably more beneficial to suffer the higher rates of income tax on the rental income. If, however, you intend to build a larger portfolio of properties over the longer term and retain the rental income with the intention to pass the portfolio on to future generations, then a limited or management company route maybe the way to go.