I have lots of property conversations with expats and there is always the thorny issue of what’s the best way to set up property investing tax-wise. So how to simplify a complex issue?
There are a few things worthy of consideration.
Should Investing be personal? Or via a Special Purpose Vehicle?
One of the challenging questions is how to set up your investing at the outset; buying personally or going down a Special Purpose Vehicle (SPV) route, which could be via a Limited Company (Ltd Co.) route or a Limited Liability Partnership (LLP) route.
Evidently everyone needs to have tailored advice for their personal situation, but are there any Rules-of-Thumb or principles that can be borne in mind?
Level of Borrowing
A key determinant is how you are going to finance the property purchase. If you plan to have a lot of borrowing, then it is worth giving serious consideration to buying via a SPV otherwise you could end up paying tax on ‘nominal’ income, given how the mortgage interest tax relief works for personal investments.
Prior to April 2017, landlords could deduct their entire mortgage interest costs as expenses against the rental income they earned. They would then pay tax at their personal tax rate on the remaining profits. Now though, mortgage costs are not treated as an expense, a 20% tax credit is used instead. This means higher-rate taxpayers are hit hardest and basic rate taxpayers could be drawn into the higher rate tax bracket unwittingly, by virtue of gross rental income being added to other forms of income.
Limited Companies have a different tax structure, with Corporation Tax levied, currently at 19% for profits generated. And if you choose to take dividends as a way of extracting profits from the company, dividend tax is applicable in addition (current rates), but you can time your dividend payouts for maximum tax-efficiency, or leave the profits rolling up within the company to buy the next property. A Ltd Company can help with IHT planning as well. Stamp Duty Land Tax (SDLT) still applies though.
So there is a constant tension and balancing between mortgage interest deduction, Stamp Duty Land Tax and the various other tax rates.
There are some accessible things you can do if married. You can apportion ownership between spouses – via a Declaration of Trust and assigning Beneficial Interest. Bear in mind you can’t just shift income between spouses, unless it is matched by a commensurate capital holding, or aligned with beneficial interest.
You can also do 90:10 split in a LLP vehicle.
Property Price point
The solution might be different whether you are buying at an accessible price point in the Midlands and up North, or at a higher SDLT tax band in London or the South east.
Non-resident investors used to be able to sell property free of Capital Gains Tax but that is no longer the case.
Number of properties
If someone is just starting out with 1 or 2 properties vs a portfolio landlord with 4-5+ properties, it is important to have a view at the outset of how many properties you intend invest in. It is harder and more expensive to switch from a personal investment to a Limited Company, but it is possible to hold properties in a mix of ways.
Nature of buying – trading or investing?
Are you a property trader or investor?
If you buy a property to make value-added improvements and sell on for a profit, you’re a developer or a trader. So you are likely to be better off buying as a limited company, given you have more flexibility for taking profits. As an individual you are more likely to have your gains taxed as income.
If you are a buy-to-let landlord you fall more into the investor camp. Traditionally investors have operated as personal investors, but some could benefit from using a limited company since the 2017 tax changes.
Personal vs Ltd Company mortgages
It’s important to consider the whole picture, not just tax. Lending is approached differently for a company vs personal secured borrowing so you need to also consider ability to borrow. Whilst there are more lenders who offer mortgages to Corporate bodies now, there is still more limited choice than for personal lending and what there is for Ltd Companies, usually comes at a premium to personal lending.
Top Tip – You need to take care unless you are holding – or plan to hold – a lot of properties – that you don’t end up spending more on the investment structure than you actually stand to make
Based on content from a Webinar interview by Louise Reynolds with Churchill Tax advisers
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