Effective tax planning utilises all available tax breaks legislation provides for. Nobody in their right mind wants to pay more tax than they are supposed to pay, but not everybody knows how to go about optimising their tax position or even the existence of many forms of tax relief available to them. HMRC recently had a motto that “tax needn’t be taxing”. If that was their goal, I’m afraid they failed!
I have been studying tax structures for landlords since I began my career in Financial services in 1987 but ever since the 2015 Summer Budget it has been my primary focus. With the correct planning it may well be possible for you to utilise tax legislation to optimally restructure your property rental business, without any requirements to refinance or to pay capital gains tax or stamp duty. I’m not referring to loopholes or tax dodges but perfectly legal structures that your average accountant might never consider bringing to your attention.
There are a number of restructuring options you may wish to consider and some will be more appropriate than other. For example:- If you are married, the first level of tax planning to consider is a restructure of your income to optimise all available basic rate tax allowances with your spouse (currently £43,000 each) and then to purchase any further properties in a company.
The tax changes to mortgage interest relief will only affect you if your total taxable income (including mortgage interest) exceeds £43,000 a year. Restructuring income between spouses is achieved by changing the percentage of ownership of your rental properties. It only costs £250 + VAT for each property to achieve this and does not necessitate refinancing. If your total taxable income is significantly higher than £43,000 each (you/spouse/partners) then incorporation may well be a better option.
Incorporation is more effective for partnerships where total taxable income including rental profit plus mortgage interest exceeds £43,000 a year for each partner. If your taxable income for each partner is only marginally greater than this figure then incorporation of your existing rental property business might not be the most economical course of action for you to take.
The general rule of thumb is the higher your taxable income and mortgage interest is, the better off you will be by considering incorporation. If you are not already a partnership you may wish to consider a stepped approach to incorporation in order to avoid having to pay Stamp Duty on the transfer of assets. There are two methods to achieve this which very much depend on whether or not your are married. The process involves becoming a partnership now and then incorporating after three years.
If you are not married you can minimise the tax and other risks usually associated with forming of a partnership by transferring just 1% of the net value of your business to the new incoming partner, e.g. friend, sibling, lover etc. This would incur just a fraction of the CGT and Stamp Duty which would otherwise become payable. With the correct structure there will no necessity to refinance.