Property investors: Is now the right time to restructure?

There is currently a renewed focus on the property market, especially residential property as the pandemic coupled with the Stamp Duty Land Tax (SDLT) holiday has seen activity in the market increase. In addition, attention has started to turn to what tax changes might be seen in the future to help balance the government’s books following the increased spending to support the economy.

What this means for property investors

While possible Income Tax rises will affect the yield on investments for rental businesses, it has been widely discussed that we may well see increases to Capital Gains Tax (CGT) when the time comes for the Chancellor to recoup some of the recent outlays.

The current rates of CGT are:

If for example the rates are changed so that gains are taxed at a taxpayer’s marginal rate of Income Tax, this could see an increase of up to 25% in the rate of tax payable on these gains for an additional rate taxpayer.

This combined with general market uncertainty and speculation that reliefs such as private residence relief might be reviewed could mean that now is a good time for property owners to review the efficiency and structure of their property interests.

Actions to take

Typically property investors holding their assets directly consider two options for restructuring; Trusts or companies. This largely depends on what they are trying to achieve. For many Income Tax savings and loan interest relief are fundamental, whereas for others Inheritance Tax (IHT) and estate planning are at the forefront of their minds.

• Trusts - Those looking for control and IHT savings often consider a Trust first as typically they do not have CGT or SDLT issues on creation. However there are limits as to the value that can be settled without an IHT charge. The level of the nil rate band is currently £325,000 for each settlor so a couple could settle £650,000.
• Companies - Many taxpayers choose to hold property interests within a company structure often referred to as a family investment company. There is no restriction on companies for loan interest and rental profits are taxed at corporation tax rates (currently 19%) rather than Income Tax rates (currently as high as 45%). Family members can become shareholders which can be efficient from an IHT perspective and control for the founder can be retained via the shareholders agreement, which means that a FIC can be a viable alternative to a Trust. That said there are disadvantages. The major hurdles for incorporating a property business can be the potential for upfront CGT and SDLT costs. Also, companies work best if profits are retained within the company or only distributed to shareholders taxed at lower rates. Distributions to higher rate taxpayers result in a high double tax charge and can remove some of the benefits.

The current SDLT holiday, which reduces the amount of SDLT payable for properties under £500,000 to 0% or 3% and the potential for an increase in CGT rates means that there is a currently a window of opportunity to consider this planning with a cheaper tax cost.