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Landlord Tax

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Mark Alexander founder of Property118.com

Mark Alexander founder of Property118.com

My landlord strategy is based upon the intended outcome, NOT income. It is important to note that this strategy is not available or right in all circumstances.  I do not recommended that you read this landlord strategy as a stand alone article, otherwise you may well come to the conclusion that my entire strategy is high risk and based entirely on high gearing. That is not the case and several other factors documented in the Advice section of this website must be taken into consideration.

I suspect your core tax strategy isn’t much different to mine, i.e. make as much money as possible and pay as little tax as possible – legally of course!

It is perfectly legal to structure your affairs to pay the minimal amount of tax and that’s exactly what I do with the help of my accountants.

As you may know, British law is partly based on legislation and partly based on case law. The following is one of my favourite quotes so far as tax case law goes. It is from the case of Inland Revenue Commissioners v The Duke of Westminster (1936 19 TC 490), which held: “Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.”

So how do I minimise my landlord tax?

As I was building my portfolio I wasn’t at all interested in drawing money from the business, that came 20 years later when I took early retirement.

During the initial growth period I borrowed as much as my cashflow and my assets would sensibly allow and continually reviewed my portfolio looking for opportunities to refinance and release extra cash. That meant that my cashflow was always very close to zero. By the time I factored in arrangement fees charged by lenders, which were added to mortgage balances, I was operating in a paper loss situation. Whenever property values and rents increased I would refinance to release more cash for investment and to build a liquidity fund. Over time I was able to borrow substantially more than I had paid for the properties based on this refinancing strategy. Each time I did this lenders fees were added to mortgage balances. In 2003 alone I raised an additional £1 million using this strategy. All funds were used for reinvestment and to increase my liquidity reserve and were not withdrawn from the business for personal expenditure. As my property portfolio grew, so did my wealth but my cashflow remained neutral and fees added to the mortgage built up to significant paper losses. Therefore, I had an ever growing bank balance, an ever growing property portfolio and paper losses, hence no tax – happy days! :)  These losses accumulated but there were a few problems I had to deal with to make my strategy future proof:-

1) It is only possible offset these losses against future rental profits, I could not use them to offset profits from other business activities. Fortunately though, rental losses can be rolled forward indefinitely. Now that I am retired I am making substantial rental profits but these are not being taxed at the moment as I’m offsetting them against accumulated losses.

2) It is only possible to offset mortgage interest against rental income subject to having a positive capital account. That means that drawings (withdrawals for personal expenditure) from the property portfolio must not exceed the capital invested personally. Given that I had borrowed considerably more money than I had invested into the portfolio my accountants monitored this very carefully for me.

3) Money raised from refinancing and which is subsequently reinvested does not count as new capital invested. Therefore, when the day comes that I have used up all of my accumulated losses and I want to start drawing money out of the business to fund personal expenditure I will need to move over to phase two of my strategy.

This part of my personal landlord tax strategy is only viable for couples who are married or in Civil partnerships.

The sale of a property between spouses is exempt from Capital Gains Tax. The profits on sale are not treated as income either which means that all sale proceeds are tax free and can be used for any purpose including personal expendture. Very simply, the spouse buys the property with the benefit of yet another maximum mortgage. Due to the purpose of that mortgage being the purchase of a buy to let property 100% of the mortgage interest can be offset against the rental income.

Please note that the base price of the property remains unchanged for CGT purposes. Therefore, when your spouse sells the property to a third party, the CGT will be based on the original sale price and not the price at which the property was transferred between spouses. Interestingly, this is not the case if the sale of the property is Court ordered as a result of a divorce. Please also note that stamp duty may be payable on the sale of property between spouses, again this will not be the case if the transfer is Court ordered as a result of divorce.

The strategy of selling between spouses is particularly useful for people who want to use property investment as a vehicle to fund private education for their siblings and grandchildren.

Limited companies and trusts

The strategy I have described above is for long term holding of residential property which is let to produce an income. I do not use limited companies or trusts for this purpose for the following reasons:-

1) There are far less mortgage providers willing to provide buy to let mortgages to limited companies and trusts than there are to private individuals. The result is that competition is lower and rates and fees tend to be considerably higher.

2) Personal CGT allowances are significant if you need to sell a property. These are not available to companies.

3) CGT can be much lower than corporation tax

4) I would lose the CGT exemptions of the sale of assets to my spouse if I were to use a company or a trust

5) I may choose to live in one or more of my properties from time to time and doing so would provide me with further tax benefits in the form of PPR relief. I wouldn’t get this if the property was let to a limited company or a trust.

6) Personal withdrawals over and above the amount I would invest into a company in the form of a loan would be taxable either as earned income or dividends.

If your strategy is to develop and sell property for profit without renting it first then a limited company might be better but you would need to take advice on that.

If you want advice

I am not a tax adviser and this article should not be construed as advice, I am merely sharing my own landlord tax strategy.  My personal financial circumstances, my attitude to risk and my intended outcomes were all taken into consideration by my professional advisers to help me to create this strategy. The firm I use for accountancy and tax advice specialise in advising on the affairs of property based entrepreneurs. They are a boutique firm based in Norwich but they act for clients throughout the UK. One major advantage of using a smaller boutique firm in the provinces is price. Having said that I don’t believe you will ever find better advice from a big six firm in the capital regardless of how much you pay. I have been with them now for over a decade and I can honestly say that the fees I have paid have been just a fraction of the money they have saved me. If you would like a personal introduction please complete the form below.

Accountants Introduction Request

Want to learn even more?

My buy to let property investment strategy is documented and constantly updated in the Advice section of this website. To get back to the main menu >>>

 

Landlords Buy to Let Property Investment Strategy

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Comments

  • All my U.K. Tax affairs and business interests are now handled by Pacific Group in Norwich.

    I was initially referred by Mark and Property 118 and after an initial visit, explaining to them my investments and and future goals, I decided to use them for all my property portfolio and business interests in the U.K.

    I am very impressed by the level of personalised service and I would highly recommend them.

    The level of service is far better than expected and I would advise anyone to pay them a visit and explore how they can help you to organise your tax affairs correctly and plan for the future in the most tax efficient manner.


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  • I am a totally DIY buy to let investor and have built up with my partner a small portfolio of property in Eastbourne. My philosophy is to buy right – worst property in the best street, either as an executor sale or a repossession. This has also included a huge learning curve in buying freeholds, enfranchisement, RTM. This has been tough but successful but the other side of the coin are the associated tax issues which I have researched as far as I can. At the beginning of the year out of the blue I was faced with an HMRC check! this was onorous – fortunately we have someone who deals who submits our accounts although we don’t have anyone that advises us in depth . However this investigation drilled down every aspect of the business and I have woken up to the issue of re-mortgaging properties (the interest can be set off against the income). HMRC have their own take on this which seems to differ from some accountancy firms. I would be interested to know more about this and information from others who are uptodate on re-mortgaging and re-using the monies for further deposits or on a trip to Barbados! Going forward I am very aware of the benefits of good advice on tax issues as what was once just a couple of properties has turned into a business!


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  • Hi Jill,

    Sounds like you need our friends at Pacific :)

    See >> http://www.property118.com/member/?id=452
    Neil Patterson recently posted…Don’t end up giving it away – Another IHT thought provokerMy Profile


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