Property ownership: what is right for you? Sponsored feature by Deloitte

In a special feature by Deloitte we look at the three important questions for investors to consider when deciding on property ownership

Stephen Hall and David Hicks of Deloitte
Stephen Hall and David Hicks of Deloitte

Property ownership – what is right for you?

There is no “one size fits all” answer that dictates the right way to hold property. Instead, there are three important questions for the investor that should illuminate the most suitable route:

1. What am I planning to do with the property? Rent it out, develop it for sale, live in it, aim for speculative profit, use it to house my business?

2. Who am I? UK resident private individual, UK business, overseas investor, group of club investors?

3. Do I need debt and if so where will it come from?

Tax advisers get very excited about whether you aim to hold the property for the long term or whether you are intending to sell at a profit within the short term. For long term assets any profit on eventual sale will generally be a capital gain (taxed at 28% or currently not taxable for non-UK residents, but see below) whereas profit on sale of short term assets will generally be income (taxed at up to 45%). The intention you have at the time the asset is acquired is critical. Complication and tax costs can arise if you change your mind later on. All of this can be a trap for the unwary, but it can also be successfully managed.

What to do next

Square One Law, Brewin Dolphin and Deloitte have joined forces to offer advice on personal finance from a wealth management, legal and tax perspective.

For general enquiries about financial planning, please call on 0191 230 7060. This number will take you through to the Brewin Dolphin team who will pass on your query to the relevant expert.

Alternatively, fill in the form at the bottom of this article to outline your enquiry. Our experts will respond to your enquiry within three working days by your preferred method of contact.

The key issues you may need to discuss with an advisor are outlined as follows:

Living in the property

For a UK resident individual who plans to live in the property, preserving the capital gains exemption available for one’s own residence will be key, and this would normally involve the person holding the property in their own name.

It is worth noting also when considering personal ownership of residential properties, that significant changes to Stamp Duty Land Tax (SDLT) rates and bands were introduced by the Chancellor at the Autumn Statement that seek to cut stamp duty for “98% of people who pay it” from 4 December 2014. However, where individuals are buying a home worth more than £937,500, the SDLT charge will now usually be more expensive than before.

Chris Ison/PA Wire

Letting property

Rental property can be held personally, through a partnership structure or through other structures such as companies.

Ownership through a company may give lower ongoing tax charges as corporation tax rates at 20% (from 1 April 2015) are lower than income tax rates, but if the property is to be sold and money subsequently extracted from the company, there will be a further tax charge to consider. Anti-avoidance provisions may apply if property is owned through a company, though rental properties normally qualify for relief from the provisions that apply to non-natural persons. More details are below.

A club of investors aiming to let the property may well find it beneficial to hold the property through a partnership structure, such as a Limited Liability Partnership, as this is likely to facilitate the commercial flexibility they need in sharing profits and should not distort the tax position; each partner is taxable based on their own tax status. Again however, the right decision will depend on the specific fact pattern.

As far as debt is concerned, the main concern is ensuring that as much interest cost as possible can be offset again rental profits and that the structure does not hamper this. For interest paid to certain types of lender (though not UK banks), there could be a liability to withhold income tax from the interest payment. It is important to identify this risk so that it can be managed.

Property used in a business

If the property is being acquired for use in a business, it may be best for the property to be held in the business structure for both commercial and tax reasons, but it does depend on the specifics.

Anti-avoidance – ownership through non-natural persons

Annual Tax on Enveloped Dwellings (ATED) is an annual charge on UK residential properties worth more than £2million owned by “non-natural persons”, such as companies. These charges are about to affect more companies, as the threshold will reduce to £1million from April 2015 and £500K from April 2016 and this is coupled with a significant increase in the existing rates of ATED payable from April 2015. In addition to this annual charge, properties worth more than £500,000 are subject to a 15% SDLT rate on acquisition by companies, which is higher than the rates of SDLT which usually apply.

Furthermore, any gain made from 5 April 2013 on a property caught by the ATED rules will be subject to Capital Gains Tax (CGT) at 28% as opposed to the cheaper corporation tax rates that would otherwise apply (currently up to 21%, but reducing to 20% from 1 April 2015). Given the aforementioned significant reduction in the value of properties caught by the ATED rules going forwards, more properties will be brought into the ATED-related CGT charge. There are various exemptions and reliefs from all three provisions, in particular, for properties let to third parties.

Anti-avoidance – ownership by non-residents

Whereas the position for an overseas resident individual was previously more straightforward, recent developments have made ownership of UK residential property for an non-UK resident individual, or indeed company, far more complicated (and expensive!).

Non-UK residents are usually not subject to UK CGT, however, the Chancellor announced in December 2013 that he would look to extend the scope of CGT to tax any non-UK residents disposing of UK residential property. With the consultation process now almost complete, changes are coming in from 6 April 2015 which will bring non-UK residents into the scope of CGT for property gains realised on disposals from 6 April 2015. CGT will generally only apply to the increase in value from April 2015.

Whilst properties held within companies could potentially be subject to both types of CGT, the non-resident CGT rules are wider and so will apply to more properties, including to rental properties.

Should I restructure existing property investments?

Structures are generally put in place to deal with the tax and commercial environment at the time. In the last few years we have seen major changes in UK tax rates, such as the 45% income tax rate, reduction in corporation tax rates, and more recently the Stamp Duty Land Tax bandings and Annual Tax on Enveloped Dwellings. With significant changes in asset values still relatively fresh in peoples’ minds, there is a window of opportunity at present to look again at existing structures and refine them if necessary. This could become more difficult if asset values increase.

Conclusion

While there is no one solution for all investors, there is a range of solutions that should be considered to address an investor’s fact pattern.

What to do next

Square One Law, Brewin Dolphin and Deloitte have joined forces to offer advice on personal finance from a wealth management, legal and tax perspective.

For general enquiries about financial planning, please call on 0191 230 7060. This number will take you through to the Brewin Dolphin team who will pass on your query to the relevant expert.

Alternatively, fill in the form below to outline your enquiry. Our experts will respond to your enquiry within three working days by your preferred method of contact. If you can't see the form below - click here to open in a new window.

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