Buy-to-Let Tax savings for Investors
Anyone who is a Buy-to-Let investor holding property personally should consider this possible tax saving scenario. It might reduce tax on rental income as well as achieve a Capital Gains Tax (CTG) free uplift in base cost, while allowing income to be accessed free of tax. This possible solution which uses a Limited Liability Partnership (LLP) might also provide an Inheritance Tax (IHT) efficiency.
Let’s assume the following:
- An individual or a group of individuals own an asset or assets which generate a significant level of rental income. Such income is subject to higher or additional rates of income tax; and/or
- Significant capital gains are inherent in the property or property portfolio or another class of asset; and
- The individual or individuals wish to mitigate their ongoing tax liabilities; and
- The individual or individuals are willing to revise the structure through which they currently operate.
Their objective might simply be achieved by:
- The individual or individuals transferring the property into a LLP and operating the business through this structure. This needs to be done for at least eighteen months. During this time, the income generated by the business will still be subject to Income Tax.
- After eighteen months the business is incorporated into a private limited company. Thereafter the profits will be taxable within a corporate structure and profits will be subject to corporation tax (currently 20%) as opposed to the more punitive personal income tax rates of up to 45% previously suffered. Profits can then be managed as part of any tax planning exercise for the individual client.
- A further benefit arising from this structure is that the assets will benefit from an adjustment to their base cost when they are put into the corporate structure. The values at which the assets are carried in the corporate structure is the market value at which they were introduced to the LLP, as opposed to the CGT cost previously carried by the individual prior to disposal.
- The transaction can be undertaken in such a manner as to allow the profits from the corporate structure to be drawn by the individual free of tax for a significant period of time.
- It also facilitates future IHT planning which may be considered whereby individuals seek to pass assets to family members (not spouse) but are put off doing so by the immediate charge to CGT.
- Shares/debt in the corporate structure can be gifted in such circumstances with no CGT charges arising.
In making such changes, it is necessary to carefully consider for whom the structure may be suitable. Quite simply, the structure is suitable for anyone with a property portfolio business that generates substantial income. There may also be an additional benefit where there are latent gains within the property portfolio or indeed other assets.
The main benefit is a reduction in income tax rates from 45% to the much lower corporate tax rate of currently 20% which will reduce further following the last budget announcement. In addition, there will be no liability to Stamp Duty Land Tax for the transfers of the property or Stamp Duty where the asset is shares and, importantly, there is an adjustment to the base cost of the asset carried by the Limited Company
Inevitably there are of course risks attached, though the risks in achieving the transition of the portfolio from the individual to the limited company are relatively low. There is however a risk that on a subsequent disposal of the assets or the shares in the company there may be a challenge by HM Revenue & Customs as to the whether there was an earlier disposal.
In our opinion this risk is relatively low. While Turner Little Limited are not tax advisors and would always recommend their clients to seek independent tax advice, they are experts in the formation of company structures.
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agents, Registered Bank Intermediaries and Business Consultants, as well as Trust providers.