Bigger Text

My Landlord Tax Strategy

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 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.”

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 All funds were used for reinvestment and to increase my liquidity reserve and were not withdrawn from the business for personal expenditure.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. 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.

 

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

 


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.


    facebooktwittergoogle_plusredditlinkedin
  • 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!


    facebooktwittergoogle_plusredditlinkedin
  • Hi Mark,

    Could you please explain how paper losses are created with an example if able? i can understand the theory but i am finding it difficult to understand how one may create such high paper losses which run on for so many years?

    Regards

    Sagar


    facebooktwittergoogle_plusredditlinkedin
  • Member of The Landlords Union - Click Here for Details

    Hi Mark

    Many thanks for sharing your tax info, it was very interesting to read. I’m sure I’m missing something but I can’t see the point of selling between spouses. If spouse 1 sells to spouse 2 there is no CGT (but there may well be stamp duty to pay) and so spouse 1 has the use of monies that would otherwise gone in CGT. However, if eventually, on selling the property to a third party (which must happen at some point, if only on death), the CGT becomes payable. If spouse 1 has spent the money in the meantime, how do you pay the tax and what would the point be?

    As I say, I’m sure I’m missing something here but would be grateful if you help point it out!

    Thanks Jamie Finch


    facebooktwittergoogle_plusredditlinkedin
  • Mark,
    Given the budget announcements around HRT then would you still stand by your view that ltd company is not the way to go.. I am just starting out (with a large-ish cashpile) and having spoken to accountants etc I am being adviced that for my situation ltd company is the only way to go.. obviously my situation won’t be the same as everyone elses but anyone in HRT, without a established portfolio, without urgently needing high levels of finance and more interested in growing the business than taking profits – ltd is the better option.


    facebooktwittergoogle_plusredditlinkedin
  • Hi Mark,

    Great article, thank you. When reading I was actually interested to know the answers to Haf and Jamie’s questions around CGT between spouses and also in light of recent changes would you still stand by your personal tax structure as opposed to a Ltd company?

    I took you up on your offer of an introduction to Pacific and I have my first session with them on Thursday.

    Thanks
    Ian


    facebooktwittergoogle_plusredditlinkedin

×

Profile has been updated! Click here to view

×

Share with your friends?

Please share this article via one or more of the following social networks

facebooktwittergoogle_plusredditlinkedin ×

Sorry. You must be logged in to view this form.

×