Save tax by transferring property to a company via Deed of Trust
Since the June 2010 Budget, it has become much more attractive for investors to use a company in their investing. However, transferring existing property into a company usually (though not always), means a hefty Capital Gains Tax Bill, as well as Stamp Duty, which makes a straight transfer into a company unviable.
An alternative is to use Deed of Trust arrangement, to transfer the beneficial ownership of the property to a company. This is a simple agreement between investor and company that the company (owned by the investor) will benefit from all aspects of the property, in return for the company taking full responsibility for the property.
This allows the profits and gains associated with the property from that point onwards to be taxed via the company, not the investor. A side benefit is that investors can usually raise higher Loan to Value mortgages than companies.
Of course, this isn’t a solution for all investors – mainly as rental profits then needed to be extracted from the company tax –efficiently. But, for Higher Rate taxpayers who are now making significant rental profits, using a property company can save thousands in tax – and that’s before the reduction on corporation tax, and increased allowances, coming in 2011.
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Using ‘Main Residence Elections’ to avoid Capital Gains Tax
Most investors are aware that no Capital Gains Tax (CGT) is payable on a property that is your home, due to ‘Principal Private Residence Relief (PPR). But, did you know that clever use of the ‘Main Residence’ election can enable PPR to be claimed on a second property, as well as your normal home?
Taxpayers can elect for a second property to be treated as a ‘main residence’. This second property must be actually available as a second home i.e. not be rented out at the time the election is made.
A ‘residence’ is a property in which a taxpayer ‘lives habitually’ and so some actual occupation of the property is needed, although this may only be occasional i.e. the second property does not have to be the one that is used the most.
The Main Residence election can also be made before OR after a period of letting, and can also be used for overseas properties. If the property has also been let at any time, Lettings Relief of up to £40k per person may be claimed.
The election to treat a second property as a main residence must be made within 2 years of the property becoming available, and can be backdated to that date. Professional advice should be taken to ensure the use of elections is made carefully, and in the correct way, to HMRC.
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Tax Year End Planning …don’t leave it too late!
Property investors should be thinking about tax planning options as year end approaches (5th April):
- If property repairs & refurbishment works are needed, get these scheduled in before tax year end. It doesn’t matter if the invoice is paid, or even received, by tax year end. If the repair work has been done, or you have incurred the legal liability to pay, it is allowable against THIS year’s income tax bill. Obviously don’t incur costs just to save tax!
- Consider changing the ownership split for property held jointly with a spouse – HMRC treat all income as taxable 50-50 UNLESS the taxpayer has elected differently!
Use up your personal allowance, and your Basic Rate tax band if possible These allowances are lost each year if not used.
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Tax losses – not sexy, but VERY useful
For many investors, annual property tax losses are generated, once all costs and allowances are taken account of. This tax loss is carried forward each year for offsetting against future rental profits.
However, these losses are extremely valuable, as once rental profits are made, these accumulated tax losses are used first, meaning profits are received tax-free.
In effect, the investor is building up a ‘tax asset’, to be used in the latter stages of the life of the rental business. It is therefore essential that, in the early years of their rental business, investors are diligent in ensuring the maximum possible rental loss is generated each year.
Also, many investors don’t realise that any losses generated by capital allowances can be offset against other income immediately. This can generate an actual tax repayment now, rather than in the future.
One final tip about rental losses – they are lost forever when an investor sells their last investment property, so investors should only sell that last property when all their losses have been used up.
Remember – tax losses are a future asset.
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Using a property investment company to save tax
How long do you intend to hold onto your investment property? If you intend to sell at some point, holding property in your own name is usually the most tax-efficient option. But, if you intend to hold for the very long term, or even until death, then a property investment company may be a better option.
Are you:
- Likely to be increasing your property portfolio size?
- Unlikely to be selling the properties on a piecemeal basis?
- Mainly financing property purchases from your own funds (or with low LTV mortgages)?
Profits up to £300k are currently taxed at 21%, meaning where profits are retained the income is taxed at around half the equivalent income tax bills, so there are more funds available to buy further properties.
The property investment company can also be used as a retirement fund. Typically, with mortgages repaid, there will be a strong income stream, which can be paid out to the shareholders as tax-efficient dividends.
Eventually, the company itself can be sold, and buyers will only need to pay 0.5% stamp duty (much lower than direct property investment). The company can also be passed on to the next generation which allows the income paid out to be carefully controlled.
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Made a loss on a European holiday property? Claim your tax rebate NOW
This is the kind of tax change that we like! Following this years Budget, losses incurred on European furnished holiday lets can be offset against ‘general income’ (i.e. earned income), to generate a tax repayment.
This applies to the 2007-08 tax year (hopefully your tax return was filed by 31/1/09?) as well as 2008-09 (last tax year) and 2009-10 (current tax year).
Previously, losses on European holiday lets could only be carried forward to offset against future profits.
This is a nice gift from HMRC before offsetting of ANY holiday let losses against general income is complete abolished after 6th April 2010– both UK and European losses.
For an initial assessment of whether your European holiday let property qualifies for a tax repayment;
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Using your spouse to save property tax
Jointly owning investment property with a spouse can generate substantial tax savings for married couples (and Civil Partnerships). This is mainly because several important tax reliefs and tax bands are available on a per person basis e.g. the personal allowance & the basic rate tax band. This is especially useful where one spouse is in a different tax band to the other, or if a spouse does not use up their personal allowance.
It is possible to have any split of beneficial ownership for properties owned jointly as Tenants In Common (it is easy and cheap to switch properties held as a Joint Tenancy to a Tenants In Common basis – the change does not incur capital gains tax)
Changing the beneficial ownership of a property means that rental income and profits can be shared in a different way to the legal ownership of the property.
This then means that income tax is charged on the profits according to the agreed split, and not on a 50-50 basis. Couples need to jointly elect for the income to be split in accordance with the beneficial title in the property.
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Tax investigations – how to avoid one
More tax investigations than ever are being launched, with landlords a specific target. Tax investigations can take years to resolve, result in huge tax bills (after adding penalties and interest to the underpaid tax) and cost thousands in accountant’s fees. Make sure your accountant is doing everything possible to reduce the chance of a tax investigation:
1. Ensure tax returns are filed on time
Late tax business and personal tax returns suggests a disorganised or even fraudulent taxpayer – the taxman concludes you could be worth looking at – HMRC doesn’t like belligerent taxpayers!
2. Explain anything unusual
Tax returns are processed by a computer that carries out analytical checks on the figures to look for anything unusual. It is vital that your accountant spots these ‘unusual items’ for you and explains them – as this can satisfy a tax inspector and so prevent a tax investigation.
3. Landlords – don’t fudge the figures
If your rental income is above £15,000 per tax year, the taxman wants a breakdown of your expenses. Basic checks are then performed check if the figures look reasonable (especially given the new requirement for landlords to declare the number of rental properties they own). It’s important that expenses are categorised correctly between each expense heading to prevent a ‘red flag’.
Hang on in there … the taxman now has only one year after the date you file your tax return to launch an investigation into it (assuming fraud or negligence isn’t suspected). So, mark the date in your calendar- once it’s passed, you can relax!
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Reduce your tax bills by setting up a property management company
Historically low interest rates means that many property investors are now making substantial rental profits – meaning potentially substantial income tax bills. One option to reduce income tax liabilities is to set up your own ‘property management company’ – without needing to sell your properties to the company.
This can mean paying tax at 21% rather than 40% – and enable a non-working spouse or family member to draw a £6k salary from the company and use up their personal allowance. Typically, tax bills can be legitimately cut by around 30%. As you would expect, there are some ‘rules’ to be followed:
- The arrangement has to be a genuine commercial arrangement – this means that the company really must be providing the investor with management services (managing tenants, arranging insurance, managing mortgage payments etc). However the company may ‘outsource’ tenant-management to a Letting Agent.
- A normal commercial charge should be made for services provided.
- Ideally, to avoid any hint that this is purely a tax-saving set-up, the company would provide management services, at the same rate, to other investors as well as the owner – even just a couple of properties (tenant-management can be outsourced to a Letting Agent).
For investors with substantial rental profits, operating a property management company can produce substantial income tax savings. And, the costs of running the company are also fully tax-deductible.
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
Are you paying too much tax on your rental profits?
All property investors are required by the taxman to file tax returns, and to pay income tax on property rental profits. Whilst most tax returns will include the ‘obvious’ costs, such as mortgage interest and insurance, many investors fail to include all the costs they are entitled to claim.- meaning they pay too much tax.
Consider the following allowable expenses – often missed by investors:
- Legal fees associated with arranging finance – even for new properties. Ask your solicitor to provide a separate invoice for the cost of dealing with the mortgage – this element is then allowable for income tax purposes. Don’t forget the valuation fee if it was a lender’s requirement.
- Mortgage arrangement fees are allowable for income tax purposes (even if added to the mortgage).
- ‘Pre-commencement. Expenses’ – expenses incurred up to seven years before a property rental business starts may be claimed as allowable expenses if they would normally qualify.
Tax returns that haven’t included these, and lots of other legitimate expenses, can easily be re-stated to reduce the taxable profit.
Contact Stephen Fay ACA at Fylde Tax Accountants for specialist advice on all aspects of property tax:
Tel: 01253 350 123
Email: stephenfay@fyldetaxaccountants.co.uk
