How to hold Buy-To-Let property?
The answer to this question depends on your long term plans for your lettings business, and how and when you may want to dispose of the properties.Your personal tax rates, your family circumstances and your other business interests will also influence your decision.
You can hold the property in you own name, or jointly if you are married or in a registered civil partnership.
Jointly owned property can potentially save on capital gains tax on disposal or inheritance tax on death. Joint ownership will also spread the income from the property between you, potentially using up both basic rate tax bands and any spare personal allowance. A married couple must share the rents equally from a jointly held property, but this rule does not apply to property held jointly with others, such as adult children, brother or sister.
Buying jointly with your adult children can help to spread the income from the property around the family, but it is wise to have a written agreement that states who is entitled to what share of the net income and the capital on disposal of the property.
An alternative is to use a company to buy the property, but this is generally only economically if you hold a large number of buy-to-let properties. If you personally pay tax at 40% on your rental income, using a company can generate a tax saving, as a small company will generally pay tax at 20% on the rental income for 2007/08.
However the small company tax rate is due to increase to 22% from 1 April 2009, while the basic rate of income tax for individuals is due to drop to 20% from 1 April 2008. So if you pay basic rate income tax, there will be no tax saving by using a company from 2008.
If you control a number of other companies the tax rate paid by your property company could increase to a rate of 30% rather than 20%.
The main disadvantage of running a lettings business within a company is the cash created by that business is held within the company. It is important to realise that the money within the company is not yours.
To extract money from the company this is usually done in the form of a salary or dividends (if the company makes a profit). Extracting the money year on year from the company can potentially lead to a double tax charge, as the company will have paid corporation tax on the business profits and then you will pay personal income tax and possibly National Insurance depending on salary levels.
If however, you are happy to leave all the cash within the company for further investment, or an eventual sale of the whole company, this extra tax charge is not a problem.
You must consider when you are likely to dispose of your properties before you decide how to hold them. As an individual you have a capital gains tax free annual exemption (£9,200 for 2007/08) to set against the capital gains made in each tax year, and if you hold a buy-to-let property for at least three years an element of non business asset taper relief will also reduce the taxable gain.
A company cannot claim taper relief and does not have an annual capital gains exemption. The company may therefore, have a higher taxable gain on the same profit on sale. The company may also pay tax on the capital gain at a higher rate than applies to you as an individual, see above.
To decide how to hold property you need to work out the numbers looking forward several years. This will always be a gamble as we cannot be sure that tax rates will remain the same. A crystal ball would help.
Taxation Solutions Limited
This information sheet is designed to be a general guide only and no liability is accepted by Taxation Solutions Limited for any loss occasioned in reliance on the information given therein.