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In this article I look at the differences between owning property as joint tenants, tenants in common or as individuals. I also explain why portfolio landlords who are married couples should own half the properties each in single names and how to deal with property ownership which is not structured for optimal tax purposes right now.
First you need to understand the difference between property investment and property development. Details can be found in an article featured in Issue 8 of Landlord News entitled ‘What sort of property business do you run?’ – click here to view.
This article focuses on the most efficient strategy for Property Investors who are married. This is, of course, my personal strategy and may not suit everybody.
The bad news is that most investor’s portfolios are structured badly. The better news is that the current structuring can be changed.
When most buy to let properties are purchased by a married couple the ownership is structured as a joint tenancy. This is where both parties technically own 100% of the value of the properties. BAD NEWS in my opinion! Especially for Estate Planning purposes. Some conveyancers recommend a tenants in common structure, not quite so bad but far from perfect for my strategy.
My strategy is to own properties individually, preferably half the portfolio each. This structure provides maximum tax efficiency for both income tax and IHT (Inheritance Tax). It also makes things simpler if you ever get divorced.
If you need to raise capital from your property portfolio but don’t want to sell properties your best bet is usually to remortgage them. This isn’t a problem until your loans exceed the amount you paid for the property. If you do end up borrowing more than the property costs and you don’t re-invest the extra funding into more property you will not be able to offset any interest payments on that part of the mortgage against your rental income as an expense for tax purposes.
The way around this problem is to sell the properties to your spouse and get your partner to sell theirs to you. All the finance raised will be for the purpose of buying properties in the eyes of HM Revenue and Customs so 100% of the loan interest can be offset against rental income. All monies raised will be sale proceeds and as transfers between spouses are CGT (Capital Gains Tax) exempt so there is no tax to pay. Note however that stamp duty may well be payable on any transfers.
If you don’t need to spend the money the difference between the sale price and the finance raised can then be deferred until you are both dead. This is very tax efficient for IHT purposes as CGT isn’t payable if the assets are sold after you’ve died and the debt to each other reduces the overall value of your estate on death. If you do sell the properties before you die you will not save any CGT as the base cost remains the original purchase price under HMRC rules. It’s still very efficient from an income tax perspective though.
The other alternative, if you do ever decide to sell up, is to move abroad a few years before, preferably to somewhere which is tax friendly 😉
When the properties increase in value again you simply sell them all back to each other and repeat the process!
To learn more about my property investment strategy please read the following posts in this order:
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