Is your property portfolio ownership structure optimised to enable you to pay the minimum amount of CGT, income tax and IHT?

by Mark Alexander

14:52 PM, 27th October 2010
About 9 years ago

Is your property portfolio ownership structure optimised to enable you to pay the minimum amount of CGT, income tax and IHT?

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Is your property portfolio ownership structure optimised to enable you to pay the minimum amount of CGT, income tax and IHT?

Mark AlexanderIn 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. Mark Alexander

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:

  1. The Roots of my Property Investment Strategy
  2. What you shouldn’t do with your buy to let mortgage
  3. How I maximise the returns on my liquidity fund (cash in the bank)
  4. Sell or hold after completing a refurbishment?
  5. Buy to let strategy – in this article Mark Alexander explains the 20% liquidity reserve rule of thumb
  6. What’s more important, cashflow or liquidity? Mark Alexander reports
  7. (You are Here) | Is your property portfolio ownership structure optimised to enable you to pay the minimum amount of CGT, income tax and IHT?
  8. The history of No Money Down and Instant Remortgages since 1992
  9. How I minimise rental voids
  10. How I choose my tenants
  11. How I minimise property management issues
  12. Are YOUR tenants YOUR best ambassadors
  13. Due Diligence
  14. My 1000th post on my favourite property forum
  15. Property management advice
  16. Property investment advice


Comments

11:19 AM, 29th January 2011
About 9 years ago

This article is without doubt the most interesting and informative piece of information that I have read for a long time. Being a landlord / developer for some 20 years now, I have owned in both single and joint names ( tenants in common ) but have never thought of your approach of selling to spouse and vica versa. Just think of the Estate agency fees that you will save , and the rental void of waiting for an external buyer £££s . Still owning some properties from 20 years ago, and well geared, will hopefully take advantage of your comments I always have intended to hold until my death .However, perhaps you could give me your thoughts on CGT / IHT with regard to holding property in a trust fund ? Excellent info and thanks very much for sharing it freely with others.

Shaun

Mark Alexander

11:45 AM, 29th January 2011
About 9 years ago

Hi Shaun

Thank you for your positive feedback.

I have looked into Trusts many times. They are excellent for protecting your own home, mortgage paid off, from the state. As you know, they can claim your home to pay for end of life care. They're also good for IHT. However, for an investor who uses debt as part of a gearing strategy they are fraught with problems. Most lenders will not lend on a property in trust. Coutts will but only at very low LTV's and their client acceptance criteria is extremely conservative.

We are working with a team of IFA's, Estate Planners and the leading UK Tax Barristers on a scheme which I've outlined here. We had hoped the barristers would have settled the scheme by now but it's taking longer than first anticipated. It's very much based on the article you have already read but with all the paperwork in place to safisfy HMRC that the inter-spousal loans will sufficiently reduce the value of the estate without affecting borrowing ability. We will let you know as soon as the scheme is settled. In the meantime, if you would like an introduction to the IFA's I've been using to date, drop me an email; mark@property118.com. They're really good guys, very knowledgeable and property investors themselves so they know what's important to us as landlords / property investors.

Please remember to share this article with any other landlords you know. Just hit the Facebook, Twitter or share buttons below the main article.

Regards

Mark

Lynne Davis

9:58 AM, 3rd January 2012
About 8 years ago

Interesting approach. At the moment my husband works full-time and I have just a small amount of irregular part-time income - not enough to qualify for a mortgage. We haven't been established as landlords long enough to put together three years of accounts to convince a lender that we're creditworthy as landlords alone, so at the moment we need his income to get a mortgage... so wouldn't that mean that I wouldn't be able to borrow on any properties that were in only my name?

Mark Alexander

10:03 AM, 3rd January 2012
About 8 years ago

Hi Lynne

I'm not a mortgage broker so I can't answer your question specifically. I'll happily refer you to a good one if you like though or by all means try our Directory. I know that some lenders will take a view on incomes but it sounds to me like you need some specialist advice which needn't actually cost you to obtain.

Ian Ringrose

13:19 PM, 10th January 2012
About 8 years ago

“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.”

I have always thought that it is “the value at the start of first renting” not “what you for the property”, however this only make a difference if you lived in the property for years before renting it out.  E.g  I think you can re-mortgage to release capital when you start to rent out a former home, but still offset the interest against the rent.The HMRC **may** consider selling properties between spouses to be avoidance of tax, they can claim that any transaction that is done to ONLY save tax is tax avoidance – but most of the time the HMRC has enough on their plates already.  But if too many people start doing this, they may take action.  (Or some MPs read about it on a website….)

Ian Ringrose

13:21 PM, 10th January 2012
About 8 years ago

If only one of the partners have an income from stable employment, then it is likely that their name will need to be on the mortgage and therefore on the property.    I had to give my wife 1% (tenants in common) of a property for this reason as I was between jobs at the time of re-mortgaging.
However if a property has been your main home (principal private residence) in the past, then changing it ownership needs to be thought about very carefully due to capital gains tax issues, mortgages advisors told us to do things (50%/50%) that would have cost a LOT of capital gains tax.   (And they are meant to be the experts, but did not even know there may be an issue.)
If you are use tenants in common on a property you rent out and are married, you need to understand what a “Form 17 Notice of declaration of beneficial interests in joint property and income” is and when/if to use it.

Smart Picture

19:15 PM, 5th March 2012
About 8 years ago

Articles like this always seem to focus on the position with married people - what if you are single?

Mark Alexander

19:41 PM, 5th March 2012
About 8 years ago

Hi Sharon, you have responded to an article about my strategy. What is your question? I will do my very best to answer it for you and if not I will point you in the right direction to find the answers.

Smart Picture

17:28 PM, 7th March 2012
About 8 years ago

I responded to an article about getting the portfolio ownership structure correct to minimise the tax. My point was that articles such as this always seem to give advice on the assumption that you are a married couple, suggesting solutions for sharing the ownership correctly between husband and wife. Does this mean that if you are single then all of these doors are closed to you? Are there any possibilities in sharing ownership with grown-up children instead, for example?

Claudio Valentini

8:40 AM, 28th June 2012
About 7 years ago

Excellent series of articles btw...my wife and I are just starting out as landlords. We inherited a property which we remortgaged 50% and have recently bought a second with the down payment of the 25% BTL mortgage taken from this refinancing. The remainig cash sits in our offset mortgage savings pot on our main home.Currently we are both into these rental properties 50/50 in terms of deeds and mortgage liability. Very intrigued by your Married couple arrangements though.

Moving forward we plan to do at least two more properties over the next year, probably on a 75%/25% loan to equity arrangement, with an ambition build a larger Portfolio and grow this into a semi retirement project once we raise the BTL deposits and any refurbishment finance.

Any deeper advice on how to restructure ownership/loans/equity on the existing two and how to structure (and who should finance/ own) the future properties/ investments.
I am a higher earner than my wife and effectively I front the ventures, and she is a part time nurse so unlikely to have the salary multiples that might be needed to secure a £140k mortgage...however on a BTL mortgage that might not be relevant.
Keep up the goodwork!

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