Effective landlord tax planning utilises all available tax breaks legislation provides for. Nobody in their right mind wants to pay more tax than they are supposed to pay, but not everybody knows how to go about optimising their tax position or even the existence of many forms of tax relief available to them.
HMRC recently had a motto that “tax needn’t be taxing”. If that was their goal, I’m afraid they failed!
I have been studying tax structures for landlords since I began my career in Financial services in 1987 but ever since the 2015 Summer Budget it has been my primary focus.
With the correct planning it may well be possible for you to utilise tax legislation to optimally restructure your property rental business, without any requirements to refinance or to pay capital gains tax or stamp duty. I’m not referring to loopholes or tax dodges but perfectly legal structures that your average accountant might never consider bringing to your attention.
There are a number of restructuring options you may wish to consider and some may be more appropriate than others, for example:-
If you are married, the first level of tax planning to consider is a restructure of your income to optimise all available basic rate tax allowances with your spouse (currently £45,000 each) and then to purchase any further properties in a company. The tax changes to mortgage interest relief will only affect you if your total taxable income (including mortgage interest) exceeds £45,000 a year. The Chancellor of the Exchequer confirmed in the 201 Spring Budget Statement that this figure will increase to £50,000 by the year 2020. Restructuring income between spouses is achieved by changing the percentage of beneficial ownership of your rental properties. It only costs £250 + VAT for each property to achieve this and does not necessitate refinancing.
A family partnership could enable you to allocate profits disproportionately to ownership and to allocate drawings disproportionately to profits. For example, if your adult children or parents help you in your business and pay less than higher rate tax you could consider making them partners. This can result in significantly lower tax bills as well as being a useful IHT planning tool. Furthermore, it’s a step towards incorporation.
Incorporation can wash out all capital gains to date. Also, companies are not affected by restrictions on finance cost relief. However, beware CGT, Stamp Duty (LBTT in Scotland) and refinancing costs when considering the transfer of your properties to a company. Under the right circumstances, however, all of these are avoidable.
When you book a consultation I will write to you to advise you what information I need. On receipt of this information I will prepare a bespoke report for your consideration and arrange a 30 minute follow up call to answer any questions you may have.
Please note that I do not promote “schemes”. Any guidance offered will point you (and your accountant) directly to legislation which can be used to your advantage.
I look forward to hearing from you.
IS TAX PLANNING LEGAL?
The law regarding tax planning was clarified nearly 80 years ago.
In 1936 a landmark legal case was heard in the House of Lords (Inland Revenue Commissioners v Duke of Westminster [ 1936 ] AC1 (HL)). The Duke of Westminster won the case. The judge, Lord Tomlin, stated:
“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
WHAT ABOUT GAAR?
HMRC now has a very powerful weapon called General Anti Abuse Rules. It is GAAR which renders the vast majority of tax avoidance “schemes” as ineffective.
Beware any advice which may fall foul of DOTAS “Disclosure of Tax Avoidance Schemes”. The hallmarks are templated advice and confidentiality agreements. Such arrangements allow HMRC to call for repayment of all tax saved under an Accelerated Payment Notice “APN” whilst the “scheme” is being investigated. This can take years!
BEWARE INSPIRED AMATEURS
People dream up new ‘tax schemes’ every day, most of which can be pulled apart within minutes by a tax expert. This is why it pays to obtain professional advice and to consider strategies which are already proven. Some people chance their arm in terms of tax strategies and most of these end up much worse off, often bankrupt.
More Useful Links
This article explains the legislation is used to offset CGT when incorporating
This article explains how spouses can divide their income and the benefits of doing so – LINK
This article explains the legislation is used to offset CGT when incorporating – LINK
This article explains how a single landlord with a large property rental business can utilise all tax breaks by taking a stepped approach to incorporation over a three year period – LINK
If you are a partnership or a sole trader, the outcome of the legislation is that you will not be able to offset your mortgage interest against rental income. This is being phased in over a four year period.
The next question then is; would you be better off to restructure your business , and how much would it cost to do that?
Will you have a PROBLEM?
You will be unaffected if the beneficial interest in your properties is held in a limited company.
You will also be unaffected if you have no mortgages or other finance costs.
What is the CAUSE of the problem? (assuming you have one)
The primary cause is the legislation created by George Osborne – Section 24 of The Finance Act (No.2) 2015. Mr Osborne is no longer the Chancellor of the Exchequer but his legacy lives on. It is being challenged in every possible way and there is hope that it will be reversed. However, a strategy of hope is not a good strategy. Most property people prefer to feel in control of their own destiny.
CASE STUDIES – Landlord Tax Planning