The essential tax planning needed to create a profitable property portfolio
The UK’s most tax efficient structure that could save you tens of thousands over the life of your portfolio.
Building a property portfolio can be an extremely exciting way to build wealth for yourself or your family; property is one of the most profitable asset classes.
However, every property investor needs to be aware of the substantial tax charges associated with property investment, especially for those who have failed to put a tax plan in place prior to purchasing investment property…
There are several ways to go about setting up your portfolio, but it is essential have the right tax plan and structure in place to drastically reduce your tax bill and achieve a profitable property portfolio.
Whether your end goal is to access funds to create the initial property portfolio, or simply to reduce your tax liabilities when investing in property, there are options available that could save you tens of thousands of pounds over the life of your property portfolio.
Ways to buy investment property:
There are currently three core ways to buy investment property:
1. Personally – in your own name
2. Via your trading company
3. Using a Family Investment Company
Whilst buying investment property in your personal name may be your first port of call, it can leave you liable for a hefty income tax bill, correlating to your personal level of income tax. Profit from these purchases could therefore mean being charged up to 45% in income tax. Especially since the changes to Section 24 (meaning landlords no longer benefit from the previous mortgage relief of up to 45%), it is no longer as profitable to purchase investment property via an interest-only mortgage. As it stands, landlords can only claim relief at the basic 20% rate. So, all in all, buying investment property personally is not the most tax-efficient route in most cases.
By comparison, buying investment property via your trading company mitigates the impact of the changes to Section 24, and is certainly an overall better alternative for most property investors. Being liable for Corporation Tax, even at its higher level of 25%, would still leave you better off. However, there are strict HMRC rules surrounding investing company profits. Hold or invest too much excess company cash and you run the risk of becoming an investment company, rather than a trading company. This would then mean your company would lose its Business Property Relief and could incur a 40% tax penalty.
You can learn more about the 20% rule on HMRC’s website. We also cover this topic in our Insight ‘Trading Places’.
The Family Investment Company
The most tax efficient option, using a Family Investment Company, makes it possible to protect your trading company from this risk and ensure the most optimum tax position.
A Family Investment Company is the ideal vehicle for starting your property portfolio. You can transfer funds from your trading company into this ring-fenced environment, and invest them in property. Within this structure you can grow your profits, whilst also protecting your assets from Inheritance Tax for your children, should the worst happen.
By transferring company cash into your Family Investment Company and investing through this structure, you also protect your trading company from inadvertently becoming an investment company, keeping your business from getting tangled up in your investments, thus retaining your Business Property Relief. This also reduces Corporation Tax for your limited company, which frees up more funds for more property investment!
This essential tax planning can drastically reduce your liabilities, helping to create profitable property portfolio.
Why a Family Investment Company is perfect for your property portfolio:
- 0% Inheritance tax on existing retained profits
- 0% Corporation tax on investment profits
- Separates trading business from investments
- Loan funds back to your company immediately
- Invest in property or other asset classes
- Retain business property relief
- Lifetime legacy – never switch structures again
Combining a Family Investment Company with a Small Self-Administered Scheme is another strategy for creating a tax efficient property portfolio. It opens even more options up for reducing tax – to as little as 0% – and growing wealth. With a SSAS you can:
- purchase investment property
- make hands-free property investments
- invest in a vast array of other asset classes
- grow your pension fund by investing in property or other asset classes
- make loans to your company for any valid business purpose, from your pension fund
- combine multiple pension funds into one pot for greater investment power and more control
- pool pensions with family or colleagues to increase the pot and grow it more quickly
- ring-fence assets, outside of the estate
- succession planning
- retirement planning on your own terms, to your own timescales
- create a legacy
- purchase your business premises and renting them back to the company to grow the pot
- reduce Corporation Tax
- mitigate Inheritance Tax
- many other avenues for business, personal and family financial advantage
The SSAS is a corporate pension scheme, which, as a company director, you can start at any age; you do not have to be 55 to take control of your pension funds, manage them flexibly, and invest at your own discretion. It can invest in anything a traditional pension can, but with additional options such as commercial property, hands-off residential property investments, or investing in your own company. A SSAS can also have multiple members, including family members, which can serve as another way to streamline inheritance.
By combining these innovative tax planning vehicles, you can diversify your property portfolio and invest in a wide range of property, including:
- Buy-to-let
- Serviced accommodation.
- Commercial property
- Residential property
- Land for development
- Purchase of business premises
- Hand-free property investment (suited to those with minimal knowledge of property investment and the laws and regulations surrounding or those looking for minimal time commitment for their property investment strategy)
You can get more information on the topics raised in this article by reading our full-length Property Portfolio guide.
TLPI specialises in building robust and innovative tax strategies to help business owners take control, protect their wealth, and invest in property. Contact us today to find out how we can help you create a bespoke tax-efficient strategy to benefit you, your business, and your family.
