Dipesh Galaiya BSc (Hons) FCA
- Private Client Tax Senior Manager
- +44 (0)330 124 1399
- Email Dipesh [email protected]
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This year began with various challenges affecting property owners and investors, but these challenges can present opportunities to consider planning strategies.
The high inflation levels are being managed by the Bank of England’s Monetary Policy Committee through the raising of interest rates, which directly affects the cost of acquiring/owning property. The restriction on tax relief available to residential landlords on the cost of borrowing (interest etc), further exacerbates the squeeze for buy-to-let landlords.
A property/family investment company (PIC/FIC) can play an effective role in acquiring and building a buy-to-let investment portfolio by creating tax efficiencies to enhance the overall yield. The key advantages of considering a PIC/FIC over personal ownership are:
How a PIC/FIC works and its benefits are further explained in this article.
A FIC is essentially a regular company used as an investment vehicle for passing wealth to the next generation(s). As with any other company it will have:
Through your appointment as directors of the FIC, you will maintain overall control over the assets of the FIC.
With the cost-of-living crisis putting increased pressure on young parents, grandparents can step in to assist with school fees or other education costs etc for their grandchildren. A big desire for many grandparents is to leave behind a good legacy and there are tax efficient ways of achieving this.
We are often asked “I would like this property to be kept in the family but at a very low tax cost, but I do not necessarily want to hand-over the ownership.”
This can be managed well by considering a Trust, which can hold the property for the long-term benefit of the family, and on a day-to-day basis, the rental income can be channelled to the beneficiaries (i.e. grandchildren) to meet their education costs by optimising the grandchildren’s personal allowances.
This planning must be considered very carefully and further details can be found here.
The PIC/FIC described above can be used in tandem with a trust structure to hold the shares for minor children/grandchildren. This helps with protecting the FIC’s assets (against eventualities such as marital failure or bankruptcy) for the long term, and as a Trust can have a life of 125 years, it enables you to ‘skip generations’.
If you happen to own a commercial property that is used by your own business, and it has been held by you for at least 2 years, it will be eligible for 50% Business Property Relief (BPR).
Accordingly, if your property is worth £1m, a deduction of £500,000 may be made for IHT purposes on a lifetime or death transfer. If you subsequently retire from the business or dispose of it, the property will cease to qualify for this relief.
To ensure that their relief is utilised, you could ‘lock-in’ the 50% BPR whilst it is available by transferring the property into a Trust for your grandchildren. The rental income from this property can then be channelled to the grandchildren to fund their education costs.
This requires careful thought and a further explanation on this can be found here.
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