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Business Tax  •  capital gains tax (cgt)  •  Entrepreneur's Relief  •  Personal tax  •  Property  •  Tax Planning

Are you a property dealer or a property investor? – it could make a big difference to your tax bill

By RJP LLP on 22 January, 2013

Over the years, our tax planning advice when buying property has varied according to a client’s tax position and funding availability at the time. We are always being asked the question “should property be bought personally or through a company?”  The answer to this question is not clear-cut; in recent years the tax relief available on the disposal of commercial property favoured the purchase of this type of property personally, but the reliefs are ever changing, and the answer has become more subjective.

Following the introduction of entrepreneurs’ relief the position altered; commercial property owned personally and on which a market rate rental was received did not qualify for this relief, as it had for the previous taper relief. Following the subsequent increase in the rate of capital gains tax from 18% to 28% for higher rate taxpayers the position has altered yet again. If therefore you are considering purchasing property it is worth reviewing the best way to do it.

As always, each case needs to be evaluated individually, but there are certain guidelines depending on whether clients regard themselves as ‘investing’ or ‘trading’ in property.  If they are investing, they are generally looking to long term gains with the expectation of receiving the funds personally, in which case personal investment may be beneficial; those trading or dealing in property may be looking to medium term trading profits with the potential to re-invest in further trade, where there are frequent transactions and re-investment, it may be more beneficial to do this through a company.

Influencing the decision making process are a number of considerations; here we consider loan interest payments and capital gains tax (CGT).

1: Losses arising through loan interest

Interest payable on loans to buy land or property used in a property business, or to fund improvements or repairs, is deductible in calculating profits or losses.  This will apply whether the deduction is against rental income received from property investment, or against trading profits received from property development. For individual owners, the interest is a deductible expense, whereas for limited company owners the interest falls within the loan relationship rules. This can create an important difference where property investment is concerned because:

  1. For individual owners, losses arising on loan interest which exceeds rental income can only be offset against profits arising from the same property business in the same or future years. If profits don’t arise and all the properties are sold, excess losses brought forward will be lost;
  2. For owners running a ‘property company’, any losses arising as a result of excess loan interest fall within the loan relationship rules and relief for such losses can be claimed in a number of different ways; they can also be carried forward or offset against previous interest income. The effect of this is that losses arising can be carried forward for offset against future capital gains arising on the disposal of property.

In situations where loan interest is likely to outweigh rental income, this important difference in the treatment of loan interest losses can point towards company ownership.

2: Capital Gains Tax

Gains realised on the sale of property owned personally will give rise to capital gains tax at a rate of 28% for higher rate taxpayers.  In such cases, the only allowable relief is the annual exemption (currently £10,600).

Gains realised on the sale of property owned by a company are chargeable to corporation tax (at rates of 20% to 24%) and also attract indexation allowance which will reduce the chargeable gain. Gains arising within companies will therefore now usually attract a lower rate of tax than those arising to individuals. At first sight this can point towards company ownership, and indeed will do so if the proceeds are to be reinvested in other company property or ventures. If however the shareholders wish to extract the net funds, there will be a further tax liability in doing this, which may outweigh the benefit of the reduced rate of tax and indexation allowance.

Ultimately therefore, tax advice around property ownership needs to be balanced carefully according to each client’s position.  Where property investment is undertaken and any gains after a sale will be extracted, then depending on levels of income, personal ownership may be preferable.  However, for clients who intend to buy and sell property frequently, reinvesting the proceeds, and especially where they have considerable loan repayments, company ownership may well prove to be more tax efficient, at least in the short term.

For individual tax planning advice on capital gains and property ownership please contact Lesley Stalker – las@rjp.co.uk.

 

 

 

 

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