ASK THE EXPERTS
CATHERINE MCMANUS OF WYLIE & BISSET
HOW SHOULD I STRUCTURE PROPERTY INVESTMENTS FOR TAXATION PURPOSES?
ANSWER: Tax advisers often see clients invest in property to create an ‘alternative’ pension pot or to create a portfolio of assets or ‘money box’ as a legacy for their children. The investments are generally in either a portfolio of buy-to-let properties or in properties for development and onward sale. In both cases the question most asked of advisers is, ‘how should these investments be structured from a tax perspective?’
HMRC do seem to prefer trading structures over property investments when it comes to tax benefits. You only have to look at how trading structures are favoured in terms of interest, capital gain tax and inheritance tax reliefs. Some types of property development fall into trading categories, but much comes under the investment umbrella. Even where that is the case, there are still tax planning considerations when investing in property.
Holding the assets personally has benefits, in that it avoids any double taxation for those taxpayers wishing to use the cash earned for their ongoing standard of living. However, for wealthier individuals, with little need for the recurring income, limited companies tend to be more tax efficient.
The underlying corporation tax rates are lower than most income tax rates, even with increases in corporation tax in 2023, and there are more generous tax reliefs via a limited company structure especially on properties which are fully or partially funded by debt.
Limited companies can also be used to mitigate against inheritance tax on any growth in value in assets held, via the use of differing classes of shares with variances in voting, income, and capital rights spread across generational shareholders.
Like most things in taxation, it is important to review each case individually to come to a view as to which holding strategy would best suit, dependent on the type of property investment and underlying requirements for income and onward share of growth in value. The key thing is to work with a tax adviser as early as possible to consider how tax features in one’s overall objectives.