Two’s company – how investment property can still be tax-efficient

Investment Property

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Xeinadin Group

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Given the many changes in the UK taxation of landlords from 2017 onwards, you may find that it’s really not that tax efficient to continue to own investment properties personally (perhaps with the exception of Airbnb, and other furnished holiday lets).

Several more suitable alternatives may be available. As your trusted advisors, our specialists in taxation can help.

With the deductibility of mortgage costs restricted, higher-rate taxpayers will often find themselves subject to punitive effective rates of taxation on rental properties (we’ve seen effective tax rates exceeding 100%!). In these circumstances, you might find it better to invest via a limited company, which would be subject to tax at no more than 25%.

Additionally – where structured in the correct way – limited companies can represent an ideal inheritance tax planning tool, permitting gifts of current (and future) capital value much more efficiently than is the case with personal ownership.

While transferring investment properties to a limited company may sound like a no-brainer, it isn’t always the best route for everyone. When you transfer property to a connected company, stamp duty land tax and capital gains tax would be due as if you’d sold the property at market value. The costs can be challenging. Additionally, it is often the case that mortgages would need to be renegotiated.

However, there are several circumstances where these issues can be successfully navigated – some points that we consider for suitable clients:-   

  • If you own the portfolio with your spouse or another family member, can it be argued that the ownership constitutes a partnership (which would often benefit from favourable SDLT treatment)?
  • If you operate the portfolio as a business – rather than a passive investment – can incorporation be structured to benefit from favourable capital gains tax reliefs?
  • Where the capital gain is low (such as where the property was used as a principal private residence) and/or the properties have significant equity, can we create a director’s loan account, permitting tax-free draw down of future rental profits?
  • Even where the transactional cost is significant, when comparing the long-term savings to the short-term cost, might incorporating the portfolio nonetheless represent a worthwhile long-term investment?
  • Might the terms of your mortgage permit a transfer to the company under a declaration of trust (allowing the properties and mortgages to remain in your personal names)?

There won’t ever be a “one size fits all” approach to investment property ownership. That’s the added value of our Xeinadin offering as we bring the input of suitably qualified specialists with both Direct Tax and VAT expertise to ensure that whatever your objective, with careful planning, any tax savings can be achieved with complete peace of mind.

What are the next steps?

If you would like to consider your options with regard to your property portfolio, please contact us and we will put you in touch with one of our tax specialists to advise further.  

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