By Amal Shah
20 Jan 2022
When an individual has found a suitable residential investment property to acquire and it makes commercial sense, the very next question should be … how should the property be purchased?
With the changes to residential property taxation that have taken place over the last few years, in particular the restriction of mortgage interest, considering the optimal structure to acquire investment property is now more crucial than ever.
An initial decision needs to be made on whether to purchase the property:
In order to assist in the decision-making process it is important to consider the following factors:
This is the simplest method of acquiring and running your property business. Other advantages include potentially lower mortgage interest costs, cheaper ongoing compliance costs compared to that of a limited company, and if you are a basic rate taxpayer or have unused personal allowance, there will not be any restriction to mortgage interest. If you are not intending to hold the property for the medium to long term and there is likely to be a capital gain, personal ownership will avoid being taxed twice on any gain on disposal of the property. Learn more about your tax obligations when selling a property in the UK.
The main disadvantage of personal ownership is that if you are a higher rate taxpayer you will be subject to tax at the higher and additional rates of tax as well your mortgage interest being restricted to the basic rate of tax.
The profits and losses generated through a property held jointly can be assigned between the two partners at any ratio they agree on. Typically, between spouse’s joint property ownership is allocated 50:50 unless this has been formally agreed otherwise.
Limited liability partnerships (LLPs) are also a popular vehicle when building a property portfolio. Unlike personal ownership, corporate entities can be formed with limited liability (Limited Liability Partnerships or LLPs), meaning the partners agree on a structure whereby their liabilities are limited to the amount they originally put into the business. As such, the tax rates applied are therefore determined by each partner’s marginal rate of tax, which can be up to 45%. Partners should also note that there will be National Insurance implications if profits are extracted, retained, or reinvested.
There are significant planning opportunities when structuring property investments held jointly or through a partnership which can result in income tax and inheritance tax benefits.
Legal identity
One of the main benefits of company ownership is that a company has its own legal identity, meaning third parties form contracts with the company and not directors/shareholders. This means that the company will outlive an individual after death, only ceasing when formally dissolved, meaning owners, directors, and shareholders can change.
Did you know?
Through company ownership, the company has limited liability on the debts of the business. The liability is normally limited to the amount paid for the shares of the company unless other agreements were made.
It’s important to note, however, that in some cases a director can be held accountable for the company debt if the company continues to trade whilst insolvent. Unlike sole traders or partnerships, the limit on the shareholder’s liability can be unlimited, potentially leading to them being held personally liable with the risk of private residence/assets being repossessed.
Tax efficiencies
A property investment company is a tax-efficient vehicle to use as a personal ‘money box’ or as an alternative to a private pension pot, this is because:
Bringing in the family
A property investment company can also be used as a means to provide an income to other family members, in addition to providing an IHT planning structure. Some key advantages of this are:
It is important that you consider your long-term objectives, especially Inheritance tax from the outset. When regularly advice clients depending on their situation of the most optimal structure for income tax efficiency as well as longer-term IHT mitigation.
The table below summarises the tax differences between company and personal ownership:
Property tax allowance available.
Loss ‘cap’ = the greater of £50,000 and 25% of total profits on trading and property for the tax year relating to capital allowances.
Loss ‘cap’ = the greater of £5m and 50% of the next accounting period’s profits.
Tax liability for individual will depend on the method and available personal allowances.
Balance taxed at 18% if basic rate taxpayer; 28% otherwise. 20% on commercial property – business asset disposal relief may be available.
Incorporation is capital disposal for CGT purposes. Incorporation relief, gift relief or ‘hold-over’ relief, and ‘roll-over’ relief may be available.
Indexation allowance available, albeit frozen at December 2017.
‘Roll-over’ relief may be available.
VAT – none on residential.
Business property relief (BPR) does not apply.
Shares form part of the individual shareholder’s estate – due on value of shareholding.
BPR may be claimable.
Source: Tax Insider
Each individual’s situation is unique and therefore it is important to take professional advice when deciding how best to structure your property business.
If you have any questions or would like to discuss further please contact Amal Shah or one of our Property Tax advisors who would be happy to assist.
73 Cornhill London EC3V 3QQ
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