Effective 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 will be more appropriate than other. 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 £43,000 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 £43,000 a year. Restructuring income between spouses is achieved by changing the percentage of ownership of your rental properties. It only costs £250 + VAT for each property to achieve this and does not necessitate refinancing. If your total taxable income is significantly higher than £43,000 each (you/spouse/partners) then incorporation may well be a better option.
Incorporation is more effective for partnerships where total taxable income including rental profit plus mortgage interest exceeds £43,000 a year for each partner. If your taxable income for each partner is only marginally greater than this figure then incorporation of your existing rental property business might not be the most economical course of action for you to take. The general rule of thumb is the higher your taxable income and mortgage interest is, the better off you will be by considering incorporation.
If you are not already a partnership you may wish to consider a stepped approach to incorporation in order to avoid having to pay Stamp Duty on the transfer of assets. There are two methods to achieve this which very much depend on whether or not your are married. The process involves becoming a partnership now and then incorporating after three years. If you are not married you can minimise the tax and other risks usually associated with forming of a partnership by transferring just 1% of the net value of your business to the new incoming partner, e.g. friend, sibling, lover etc. This would incur just a fraction of the CGT and Stamp Duty which would otherwise become payable. With the correct structure there will no necessity to refinance.
Within a half hour telephone consultation I can usually glean enough information to identify what the best options would be for you to consider. Within another 90 minutes I can run all the numbers and prepare a report for you to consider, which includes the number crunching, explains your options, recommends the professional advisers to use for implementation and quotes for doing the work. The total cost is £400 inclusive of VAT, i.e. £100 for each 30 minutes x 4 = 2 hours in total.
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.
This article explains how spouses can divide their income and the benefits of doing so – LINK
This article explains the legislation used to offset CGT when incorporating – LINK
This article explains incorporation of a large rental property business partnership and the benefits of doing so – 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
GETTING AHEAD OF THE GAME
Before you seek professional advice we recommend you to do some preparation. This will save you a lot of time and money and give you a far clearer understanding of the options available to you. We commissioned a team of experts to produce software which serves as both a Fact Find for professional advisers, a full in depth analysis of the problems, what the position might otherwise look like based on a variety of of restructuring alternatives and the cost of implementation of the restructuring possibilities. This software is available for purchase at a cost of £97 inclusive of VAT.
Please note the software is copyright protected so you must not give or sell the download link to third parties after you have purchased it and you must not use it as a consultancy tool to advise other people without our express written permission. The software can be purchased by clicking THIS LINK
Will your mortgage interest payments be taxed as income from 2017?
The calculator below will show you how much more tax (if any) you will have to pay as a result of legislation being imposed on individuals paying buy-to-let mortgage interest from April 2017. According to Government only 1 in 5 landlords will pay more tax so you might be lucky. However, the more mortgage interest you pay, the more likely it is that you will get stung unless you restructure.
Buy-to-let calculator: how new taxes reduce your profits
(excl mortgage interest)*
|As now||Transitional rules||New rules|
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.
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?
CASE STUDIES – Landlord Tax Planning
See the links below for more tax articles
Landlords Tax Returns – 10 common mistakes
Capital Gains Tax Relief – an example of how living in a property before you sell it could significantly reduce your tax liability
Always seek professional advice from appropriately qualified and regulated professional advisers specialising in property taxation who are prepared to back their advice with professional indemnity insurance.