How To Hold BTL Property?

How should landlords hold their buy-to-let property?

The way a landlord holds their property investment can have a big bearing on their ultimate landlord tax liabilities.  It is possible to own your rental property as an individual or increasingly landlords are looking at the possibility of incorporating their property rental business to save tax.

The answer to this question depends on a landlord’s long term plans for their rental 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.

Joint ownership of your buy-to-let

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.

Holding your buy-to-let investments in a company

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 the higher rate on your rental income, using a company can generate a tax saving, as a small company will generally pay corporation tax at the prevailing rate for a small company currently 19%.

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.

Landlords need a crystal ball to forecast tax rates

A landlord 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 to set against the capital gains made in each tax year.  Some of the capital gains tax relief for individual landlords have been removed or reduced over recent years.

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 when it comes to landlord tax would always help.

 

2 Comments

Hi my wife has a property in her name only which is let on a long term basis. An increase in her income and the profit from the rental is pushing her towards the 40% tax rate. Can she make me a joint owner and share the rental 50:50 with me? If so how can we do this without causing problems with capital gains etc?

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You will need to check with your accountant but my understanding is that it is possible to have rent and capital assessed differently by splitting the rent.

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