Deloitte on how to hold property tax efficiently
There is no “one size fits all” answer that dictates the best structure for holding property. instead, there are three important questions for the investor that should illuminate the most suitable route.
1. What am I planning to do with the property? Rent it out, develop it for sale, live in it aim for speculative profit use to house my business.
2. Who am I? UK resident private individual, UK business, overseas investor group, group of club investors.
3. What debt will I need and where will it come from?
Tax advisers get very excited about whether you aim to hold the property for the long term or whether you are intending to sell at a profit within the short term. For long term assets any profit on eventual sale will be a capital gain (taxed at 28% or normally exempt for non UK residents) whereas profit on sale of short terms assets will generally be income (taxed at up to 50%). The intention you have at the time of the asset is acquired is critical. Complication and tax costs can arise if you change your mind later on. All of this can be a trap for the unwary, but it can also be successfully managed.
For a UK resident individual who plans to live in the property, preserving capital gains exemption available for one’s own residence will be key, and this would involve the person holding the property in their own name. If the UK individual plans to let the property, it will probably be advisable for them to hold it in their own name, or perhaps through a partnership, in order to access capital gains tax rates when the property is eventually sold. If rental business tax losses are anticipated, a structure that allows the losses t be offset against the person’s other taxable income could also be important. If the property is for use in a business, it may be best for the property to be held in the business structure for both commercial and tax reasons, but it does depend on the specifics.
For an overseas resident, they could hold the property in their own name or through a partnership, but ic ould be beneficial to use a non-resident company in a low tax jurisdiction. The benefits of this structure will depend on where the individual is tax resident. Overseas investors often use companies to hold UK property because it allows them to sell the property in future by selling the shares in the company – thereby saving the purchaser up to 5% Stamp Duty Land Tax. If the property is let out, any net rental income after allowable expenses is taxed at 20% for a non resident company, whereas for a non-resident indivudla it could be up to 50%. A non-resident investor letting out UK property should generally apply to HMRC for clearance as a Non Resident Landlord in order to avoid withholding tax being suffered on rental receipts.
A club of investors aiming to let the property may well find it beneficial to hold the property through a partnership structure, such as an LLP, as this is likely to facilitate the commercial flexibility they need in sharing profits and should not distort the tax position – each partner is taxable based on their own tax status.
As far as debt is concerned, the main concern is ensuring that as much interest cost as possible can be offset against rental profits and that the structure does not hamper this. For interest paid to certain types of lender (though not UK banks), there could be a liability to withhold income tax from the interest payment. It is important to identify this risk so that it can be managed.
Structures are generally put in place to deal with the tax and commercial environment at the time. Lately we have seen major changes in UK tax rates, especially the 50% income tax rate, and also significant changes in asset values. There is a window of oportunity at present to look again at existing structures and refine them if necessary. This could become more difficult as asset values increase.
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