PRA stress tests and the benefits of incorporation – With Kate Faulkner9:33 AM, 23rd August 2019
About 13 hours ago 0
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 recommend 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.”
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 All funds were used for reinvestment and to increase my liquidity reserve and were not withdrawn from the business for personal expenditure.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. By the time I retired from my other business I was making substantial rental profits but were not being taxed until I had used up all accumulated losses.
2) Eventually I had used up all tax losses
3) Tax laws have changed since I started building my own property portfolio on the basis that individual landlords will no longer be able to offset mortgage interest against rental income as an expense. However, companies can still treat mortgage interest as an expense so buying in a company name makes a lot more sense now.
4) When I started out there were were very few mortgage providers who would lend to limited companies and those that did charged more. The tide is turning on that as more lenders are seeking to protect their business by offering increasingly more competitive limited company buy to let mortgage products. I needed to switch strategies and move my property portfolio into a company structure. That served up a number of challenges including capital gains tax, remortgaging and stamp duty payable on the transfers. I spent over 18 months investigating all possible solutions and now consult on this – details HERE.
Fast forward to when I am now.
I live in Malta as a tax exile and enjoy 300 days a year of sunshine and Mediterranean lifestyle. This move put me into a position whereby I could sell my properties to my own UK limited company and only pay CGT on capital gains made after April 2015. As a partnership I was able to claim stamp duty relief on the transfers and I used another legal structure to avoid the need to refinance. Shares in a UK limited company can be sold by a non-UK-tax-resident to a Maltese holding company. UK corporation tax remains payable on profits made in the UK but all retained profits can then distributed to the Malta Holding Company Tax Free. The benefit of this is the Malta Holding company can distribute profits to residents of Malta tax free, i.e. no dividend tax. I’m not stuck in Malta, I can move around as much as I want, especially in Europe. For example, I could also have holiday homes in Spain, France, Poland, Ireland etc. and spend as much time as I want in them subject to remaining resident in Malta for tax purposes. The only restriction is the number of days I can spend in the UK and of course having a property in Malta as my official residence.
Living abroad is not the only viable end goal and doesn’t suit a lot of people. There are several tax structures available which enable people to continue to live in the UK.
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 >>>
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