From April 2024, all landlords with income over £10,000 per year will be required to comply with Making Tax Digital (MTD). This will be extended to…
Ownership of property should be considered carefully, whether it is the family home, a holiday home, a furnished holiday let, a buy-to-let portfolio, commercial units or a property rental business.
The solution is entirely dependent on your particular circumstances and ultimate objectives. As objectives often change with time, due to a change in mind-set, financial circumstances, tax rates or health, the ownership strategy may need to change accordingly.
Common reasons for a change in property ownership are to alleviate concerns over wealth preservation, enhance yield, mitigate taxes and can range from equalising the value of estates between married couples to more complex family succession planning and business restructuring.
Here are examples of where changes in property ownership might be considered:
- Transfers to your spouse or civil partner – such transfers may be made with the objective of equalising the value of estates for inheritance tax (IHT) purposes or reducing income tax liabilities. A change in ownership may also enable the full use of the capital gains tax (CGT) annual exemptions, worth £12,300 per person for the 2020/2021 tax year. Care should be taken where there is a mortgage.
- Creating a family trust – this may be desirable where property is to be passed down in lifetime for the benefit of future generations but retain control of how the property is managed. A transfer of a property into a trust can provide protection of the asset, mitigation of your IHT exposure and without incurring a CGT charge on the transfer.
- Realising your investment – you may decide to ‘sell up’ and either reinvest elsewhere, gift some of the proceeds or spend it on yourself! There are noises being made that CGT tax rates may increase, potentially in line with income tax rates, therefore crystallising a capital gain now may be a sensible strategy. We would also explore other ways where you may wish to defer the payment of CGT or whether the gain can be rolled over into another asset.
- Family succession planning – a property investment company can be useful for IHT planning, as different classes of shares could be issued to the younger generation entitling them to any future increase in the capital value of the company. Although this doesn’t reduce the IHT position for the original shareholders, it does limit their IHT exposure so that the value of any future growth falls outside their estates. It is also easier to gift shares in a company than to gift property so this could form part of a longer term strategy.
- Operating your rental business through a limited company – individual residential landlords are restricted to a basic rate tax deduction on 100% of their finance costs each year. In her recent blog, Victoria Alford discusses the full impact of the mortgage interest restrictions. However, these restrictions do not apply to corporate landlords! The transfer of your business to a corporate vehicle may therefore be attractive, particularly where a property portfolio is highly geared.
Whilst inherent capital gains can be a hurdle when disposing of your property business to the company, where circumstances permit, the disposal can be made so that the CGT is deferred until such time as you dispose of your shares in your company, which may never occur! As the base costs of the properties are uplifted to market value on incorporation, this in turn reduces the tax payable of a disposal of the property by the company.
Whilst stamp duty land tax (SDLT) can be a significant cost when transferring property, the reduction in rates for residential property purchases costing up to £500,000 until March 2021 provides a window of opportunity to make a change more tax efficiently. In certain circumstances, the SDLT on incorporation of your business can be done with no SDLT cost! My colleague Tania Donald discusses the tax and commercial considerations for partnerships that incorporate their property business in a recent blog.
- Using your pension fund – you may have been considering the acquisition of commercial property by your pension fund. Any rental income received by the pension fund in respect of the property is tax-free. A further benefit is that any capital appreciation of the property whilst in the pension fund is free of CGT. Pension funds can borrow up to 50% of the value of the property. This is particularly useful if the pension fund is not large enough to meet the full cost of the property.
One of our specialists would welcome the opportunity to discuss the ownership of property with you to ascertain whether sensible changes should be made to meet your objectives in the short term and for the future.