Property and UK Tax (Part 2)
Last week we were thinking about how our property strategy and aspirations affect our tax bill and this week, we’re going to start thinking about how to best structure our affairs to make our businesses as tax efficient as possible.
Following amendments to Section 24, things have changed somewhat – so let’s set the scene by looking at how it used to be in the old days. Relatively speaking, it was all rather straight forward. Well, tax is never totally straightforward, but it was quite easy to work out what you needed to do.
For example, if you were going to buy properties as buy to lets and if you were going to hold these properties and rent them out, then the best way of doing this was usually to hold them in your own name. Then, when it came time to selling the properties, you’d be able to use your Capital Gains tax allowance. At this moment in time for the period 2017/2018, this would equate to £11,300. And, if you wanted to increase the tax efficiency of your property holdings, you could buy your properties jointly with a partner and you could both use your Capital Gains tax allowance.
If you were buying properties to trade, then things were a little bit different. Many assumed that if they were to buy a property that increased in value, because the capital value had increased, they would then be subjected to Capital Gains Tax. But this is not actually how it worked. In the eyes of HMRC, this would be considered “a trade” – and if it’s a trade, then it’s an income-producing activity rather than a capital-producing activity. So, if you were going to go into flipping properties regularly, then you wouldn’t be able to offset the profit against Capital Gains Tax and HMRC would instead charge you Income Tax.
So, the received wisdom was that if you were going to trade properties and wanted to be as tax efficient as possible, then this should be done through a limited company.
Corporation Tax, which is what a limited company would be charged, is currently at 19%. However, the Government have recently said that they want to take this figure down to 17% by 2020. Then again, whether they do this or not depends on whether they stay the duration. But as things stand today, Corporation Tax at 19% is still less than income tax – and certainly significantly less than the higher rates of income tax.
Now there are various problems with this, which I’ll be discussing over the coming weeks, but in the old days, this was essentially it. So, if you were going to buy and hold property then it was advisable to do it in your own name, and if you were going to trade property, then you should do it through a limited company.
What about today?
In terms of flipping and trading, then the above advice probably hasn’t changed. However, this is taking quite a simplistic view and of course, you should add into this your own personal circumstances.
Don’t forget that this is just me musing on the subject and it isn’t tax advice – so talk to your accountant to make sure you are doing what is right for you. But following Section 24, I would say that the received wisdom is that holding buy to let properties in a limited company, which can still off-set mortgage interest when calculating Corporation Tax, and using a limited company for flipping, is probably the most tax efficient way of running your property business.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
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