Real Estate: creating your tax strategy
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.
Property and family investment companies
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:
- A PIC/FIC is subject to Corporation Tax at a rate of 25%, unlike personal income tax rates of up to 40/45%;
- Within the PIC/FIC environment, the mortgage interest expense is fully tax deductible, unlike under personal ownership where the tax relief is restricted to 20% of the overall cost of borrowing; and
- There is greater flexibility in terms of profit extraction from a PIC/FIC, unlike personal ownership.
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:
- Shareholders – which can include various family members, and
- Directors – who will usually be the custodians or those who fund the FIC.
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.
For further information and guidance on creating your tax strategy, contact us today.
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