Philip Jones, Director at Hallidays Business Advisers and Accountants, answers your questions about the most tax efficient way to manage your business property.
What structure should I hold my Buy to Let properties in for tax purposes?
There are a number of options relating to how a property should be held in terms of tax, however in all circumstances the tax reasons may differ from the commercial reasons.
Specifically for tax purposes a property can be held in a number of entities, such as a limited company, partnership, or as an individual. The type of property and whether it’s residential or commercial might determine where the property is held.
If the landlord is a basic rate taxpayer then invariably it will be more tax efficient to hold the property as an individual or through a partnership, as opposed to through a limited company. Based on current tax rates there isn’t a marked difference between the basic rate of tax (20%) and corporation tax rate (19%).
However, with the introduction of a restriction on mortgage interest relief for higher rate taxpayers from 6th April 2017, it is now possible that basic rate taxpayers can end up becoming higher rate taxpayers as a result of this restriction.
Further issues around the additional rate of Stamp Duty Land Tax for companies and second properties also need to be considered.
It is therefore crucial that each individual case is assessed on its own facts, as two different landlords with similar property income may have a different tax result.The main difference between a partnership/ individual landlord and a limited company landlord is the exit route and the gain made on the sale of the property. For example, if a property made a gain of £100,000, and that property was held personally, the capital gains tax annual exemption of up to £11,700 is tax free, and the capital gains tax payable would be 18% for any gains within their basic rate tax band, and 28% on gains in excess of the basic rate band.
If the gain was made in a limited company it would be taxed at the current corporation tax rate of 19% and the funds would be retained in the company. If the shareholder wanted to then extract the funds as a dividend this could cost a further 7.5% income tax for a basic rate taxpayer, 32.5% income tax for a higher rate taxpayer or 38.1% income tax for an additional rate taxpayer. Therefore holding properties in a limited company rather than as a partnership/individual could cost significantly more in tax.
The structure is crucial so always seek professional advice before the property is purchased as it could save you significant tax in the long term.
Can I hold my properties in a pension scheme and what are the tax implications?
There are a variety of pension schemes and this topic only considers SIPPs or SASS which in the majority of circumstances only commercial property can be held within these schemes. Residential buy to lets cannot generally be held in a pension scheme, therefore this structure does not work for them.
Holding commercial property in a pension is a very tax efficient structure. There must be funds within the pension to buy the property but the scheme trustees can take out a mortgage to assist the purchase, and any profits made from the rental income does not attract any tax.
If the trustees of the pension scheme decide to sell the property the gain made is also tax free. The proceeds can then follow the normal rules of the scheme and will allow the beneficiaries a possible 25% tax free lump sum and they can either then draw down the pension or purchase an annuity.
This structure is very tax efficient however you should seek professional advice before doing this to ensure your personal and commercial circumstances are considered as well.
For information of users: This material provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
For further professional advice on tax efficiencies, please take a look at our tax page or contact Philip Jones at Hallidays on 0161 476 8276 or email firstname.lastname@example.org
Updated 12th December 2018
The information contained herein is of a general nature and is not intended to be received as formal professional advice. Whilst we endeavour to provide accurate information, there can be no guarantee that the information is accurate as of the date it is received, or that it will continue to be accurate in the future, due to legislative changes. It is therefore important that before you act upon any information contained herein you seek appropriate professional advice to take account of your exact circumstances.