What is the most tax-efficient way to property buy-to-let ownership?
Personally, or via a company?
What are the income and Corporation Tax, CGT, IHT, ATED, SDLT or VAT issues?
With tips on profit extraction and other planning points, case studies and links to further guidance.
(Read Time: Approx. 4 minutes)
- Company-owned buy-to-lets offer tax benefits and can act as pension alternatives.
- Investment companies facilitate family income sharing and inheritance tax planning.
Corporate money box/alternative to a pension
A property investment company may have the potential to be used as a tax-efficient vehicle: a personal ‘money box’ or as an alternative to a private pension pot.
- Profits can be retained by the company, without triggering further tax charges.
- The rate of Corporation Tax paid is lower than higher rates of Income Tax.
- The main rate of Corporation Tax increased to 25% from April 2023. This applies from profits of £50,000, with marginal relief to profits of £250,000.
- Retained profits can be re-invested in the company’s own name.
- When the funds are required, for example, at retirement, the owner may have a tax advantage if they are a non-taxpayer or basic rate taxpayer.
- The amounts withdrawn can be planned and controlled to ensure maximum tax extraction efficiency.
- From 2016-17, changes to dividend tax affect profit extraction by company owners. These may be an advantage in some family investment companies:
- A £1,000 dividend allowance (reduced from £5,000 to £2,000 for 2018-19 to 2022-23). Finance Act 2023 provides for this to be reduced again to £500 from April 2024.
- Three dividend tax bands apply: 8.75%, 33.75% and 39.35% from 6 April 2022. These were 7.5%, 32.5% and 38.1% to 5 April 2022.
- Dividends received by pensions and ISAs are unaffected.
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:
- You may give shares to family members: this may be done gradually, using CGT annual exemptions.
- You can use the company to maximise efficiency by using multiple personal allowances and basic rate bands. Care should be taken if shifting income to minor children,
- Changes to dividend taxation including the tax-free dividend band (£2,000 for 2018-19 to 5 April 2023, £1,000 for 2023-24) make it attractive to bring in family members as shareholders of investment companies.
- You can provide for expenditure in a tax-efficient way, for example, school or university fees.
- Family members can be encouraged to take an active part in the running of the company.
- Control can gradually be passed down to children or grandchildren.
- Gifts of shares to family members will be subject to CGT but are IHT Potentially Exempt Transfers (PETs) and therefore could reduce your taxable estate for IHT purposes if you survive seven years from the date of the gift.
- CGT holdover relief is available for transfers into certain trusts.
Taking matters a step further, this can also be a very powerful way of sheltering assets from IHT:
- You could set the shareholding up in a way that gives you control, but only a minimal legal interest, taking the bulk of the value out of your estate after seven years.
- The assets that do not form part of your estate are not subject to probate: this can help to simplify matters for your executors.
- You can retain decision-making power and direct the investment strategy.
- You can consider using the profits to make other investments, which are tax-efficient in a company structure.
Some family investment company structures can become complex and special attention is required in order to draft the company’s Articles and to fully document and register any changes in ownership.
New property business
- Choice of a suitable business structure from the outset is important as it is expensive to restructure any land and property-based business due to, for example:
- The high legal costs of transferring property.
- Stamp Duty Land Tax (SDLT), Land Transaction Tax (LTT) in Wales or Land and Buildings Transaction Tax (LBTT) in Scotland.
- Potential CGT charges.
- Joint property owners may avoid SDLT if they trade via a Limited Liability Partnership (LLP) or established partnership, however not without significant compliance costs and other factors that should be considered, e.g. wills, elections, land registry, mortgages.
- Funding and using a company structure from the start would avoid a second SDLT or equivalent charge and legal fees on a later transfer to a company without the need to use an LLP.
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