1.How to buy a property and pay only 0.5% stamp duty
If you can find a property held within a limited company, you could buy the shares in the company rather than buying the property. You pay only 0.5% stamp duty when you buy shares in a company. Basically, you will be buying the company which hold the property rather than buying the property.
2. Saving stamp duty when you buy a commercial property for conversion to residential flats (VAT1614D)
If you are buying a commercial property from a person who has opted to tax the property, you could hand in a completed form VAT1614D before the property price is agreed, the seller may be able to sell you the property without charging you VAT. This has two advantages. The stamp duty is based on the total value of the property (Net value + VAT). Therefore you may save up to 20% of the stamp duty by asking to disapply the option to tax. If there is no VAT on the sale price of the property, you will not need to find short-term finance to fund the VAT cost, which is 20% of the sale price.
3. Let property Campaign
HMRC is currently offering amnesty to declare any undeclared rental income. HMRC has a supercomputer which can go into council tax, deposit protection, land registry and any other similar records to identify property owners who are renting properties but not declaring the relevant rental income in their tax returns. If HMRC catches up with those landlords, HMRC will expect the outstanding tax + 30 to 100% tax geared penalties + interest. However, if you declare any undeclared income through above campaign (before HMRC catch up with you) then the penalty payable will be reduced to as little as 10%.
4. Tax relief on money borrowed by the director personally and then lend to the company to buy a BTL
Rather than borrowing the money through the limited company and paying higher mortgage rates, re-mortgage another of your property held in your name and lend the money to the company to buy a property and charge the mortgage interest to the company.
5. Rollover relief
If you have a company which invest in furnished holiday lettings (serviced accommodation) and then you sell the company and reinvest the proceeds in another qualified investment, the capital gains can be rolled over, and no capital gains tax is payable until the second investment is sold. In this way, you can avoid paying Capital Gains Tax indefinitely by keep investing the proceeds in qualified investments.
6. IHT & CGT planning
If you have children, you will be able to pass small portions of the company each year to the children to take advantage of the IHT and CGT annual exemptions and avoid both taxes.
7. Tax on rental income
If you invest in your name, jointly with your partner or invest through a partnership, you will be subject to income tax @ 20%, 40% or 45%. On the other hand, if you invest through a limited company, you will be subject to Corporation tax of 17% to 19% and dividends tax of 7.5%, 32.5% or 38.1% (if you draw dividends from the company). Investing through a limited company might be more tax efficient, if your salary and dividends are approximately £45K or below and not to go into the higher rate band. Salary of £8,000 to £11,000 and the balance is drawn as dividends. However, if you pay mortgage interest relating to your rental properties, it might be beneficial to buy your next property through a limited company even if your annual income is far below £45K.
8. Property purchased with a view to selling the property later on to release cash (Advise for higher rate tax payer)
You could also buy some of the properties in your name and some through limited companies. In case if you need to sell a property for cash flow reasons, you could sell the properties in your name and keep the properties which are owned through companies. If you come across a property which has a low rent yield but higher equity growth potential, it might be a good idea to buy that property in your name rather than through a limited company. On the other hand, if a property has a high rental yield and low equity growth potential, then that property may be ideal to buy through a limited company. Properties with high rental yield have the potential to suffer more from the mortgage interest relief restriction, if they are bought in your name. (Assumed property is fully or substantially mortgaged and mortgage interest is payable) However, you need to be careful when you buy a property in your name. If you buy a property with the intention of selling it in the short or medium term to realise profits, HMRC may try to argue it is property trading and attempt to treat the capital gain as a trading profit and charge income tax of 20%, 40% or 45% on the capital gain. This is not applicable to property bought through a limited company as both rental profits and gains are only subject to Corporation tax of 17% to 19% (and dividend tax, if the money is extracted from the company).
9. Mortgage interest
If you invest through a limited company, 100% of the interest is allowable as a deduction against the rental income, whether you are a basic rate tax payer or higher rate tax payer. HMRC new rules about restricting mortgage interest relief to private investors do not apply to limited companies.
10. Interest and finance costs can be set off against rental income or capital, gains, if invested through a limited company
If you buy a property which has a low rental income yield but higher capital gains potential this would especially be useful. If you buy a property in your name, HMRC will not allow you to set off any rental losses against capital gains.
11. Property disposal – Capital Gains tax when you sell the property or property company
Capital gains Tax of 18% or 28% is payable on capital gains, when you sell a property. You are also eligible for the £11,700 (2018/19) annual capital gains tax allowance. However, if a property is held within a limited company, when you sell the property, gains will be taxed at 17% to 19% Corporation tax. Dividends tax of 7.5% & 32.5% also payable if you extract the gains from the company. However, if you convert the property into a furnished holiday let (serviced accommodation) and keep it for a year and sell the shares in the company, you could be eligible for entrepreneurs relief. That means you will only be taxed @ 10% on your capital gains and you are also eligible for the £11K capital gains annual exemption. Entrepreneurs relief may also be available, if you invest in a furnished holiday letting in your name.
12. How to get Entrepreneurs relief when you sell an investment property
An investment property is a property you bought as an investment. If you have an investment property and have been renting it out as a single let or HMO and if you are planning to sell shortly it will be beneficial to convert it into a furnished holiday letting (serviced accommodation) one year before the sale to get the Entrepreneurs relief. If you own the property in your name, you will pay 18% or 28% CGT when you sell the property. However, if you follow the above strategy, CGT payable will be only 10%.
Stamp duty is only 0.5% when you sell the property company, if the buyer is happy to buy the shares in the company rather than buying the property within the company
Buying a property company is attractive to any buyer as stamp duty on share purchase is 0.5% instead of the 3% to 13% on privately owned buy to lets.
13. The base cost of the property for capital gains calculation
If you invest through a limited company, the base cost will be the purchase cost + any improvement costs. If you sell the shares in the company, this base cost will remain the same. However, if the buyer buys the property instead of the company, the base cost would be the selling price. Therefore, if the buyer buys the shares in the company, and if he decides to sell the property with the company after few years, he would have a bigger gain than if he had purchased the property instead of the company, resulting in a higher CGT. This may discourage the buyer from buying the company shares instead of buying the property within the company. However, the base cost is only an issue, if the buyer plans to sell the property in the short or medium term. If the buyer plans to keep the property for the long term, it may not concern him. Also, when the buyer wants to sell the property, if he sells the shares in the company rather than sell the property, base cost would not be an issue.
14. Reinvesting the proceeds
Rental income and capital gains can be kept in the company and reinvested in properties etc. No need to draw as dividends and therefore saving dividend tax.
15. Loans to another company to invest in property
A property investment company may reinvest its rental profits or lend money to another company, which then invest in property.
16. High rate tax payer avoiding Mortgage Interest relief restriction – withdrawing funds when your income is low or draw funds after retirement (Withdrawing when you are a basic rate tax payer)
The advantage of investing through a limited company is that you do not need to draw dividends when you are a higher rate tax payer and draw dividends when you are a basic rate tax payer. This facility is not available to a private residential property investor. Therefore, a corporate property investor takes full advantage of the mortgage interest relief restriction by not drawing dividends, when he is a higher rate tax payer and only draw dividends, when he is a basic rate tax payer. In this way, higher rate tax payer avoids the impact of mortgage interest relief restriction.
17. Part sale of property company
It may be possible to sell parts (say 20%) of the investment company each year to take advantage of the Capital gains annual allowance of £11K.
18. Rental losses can be set off against capital gains in a property investment company
Any rental losses arise during the year can be set off against any capital gains arise during the year, which will reduce the Corporation tax of the company.
19. Use of a property management company
If you decide to buy a property in your name, you could set up a company and transfer 10% to 15% of the rental income in return for managing the property, assuming you would be managing the company. HMRC currently allow this as long the transaction is legitimate and in arm’s length. Some commentators believe HMRC may climb down on this in the future, as this strategy is being abused by some property investors.
20. Serviced Accommodation – Special tax rules for rental income from properties that qualify as Furnished Holiday Lettings (FHLs)
- Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year
- You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year
- If the total of all lettings that exceed 31 continuous days is more than 155 days during the year, this condition is not met so your property will not be an FHL for that year.
If you let properties that qualify as FHLs:
- You can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders)
- You are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures
21. The profits count as earnings for pension purposes
Serviced accommodation – Vat issues When your turnover hit the VAT threshold of around £85K, you will need to register for VAT. That means handing over around 16.5% of your turnover to the tax man. You may use the VAT flat rate scheme to reduce the VAT payable to HMRC. It might also be possible to use the TOMS (Tour Operator Margin Scheme) to reduce your VAT liability further. TOMS is a grey area, and it is recommended to get written approval from HMRC before using it.
The above information is provided as general guidance to some of the services we provide. Tax legislation continues to change, and HMRC’s interpretation of the tax legislation also continue to evolve/change. The above information is a summary of complex tax laws. Above information may not apply to every situation as there might be exceptions. We will not accept any liability whatsoever, If anyone follows the above guidance and incurs any loss. If you need advice on any of the above, please contact us, and we will provide advise relating to your particular situation.
Please also note I am not an Independent Financial Advisor, and my advice/comments should not be regarded as investment advice.
Written by: Sam Niranjan FCCA FFA (Chartered Certified Accountant and Tax Consultant)