Property investments: what’s the best ownership structure?

BKL tax partner David Whiscombe and BKL tax adviser Andrew Levene discuss the pros and cons of property investment structures.

This article is also available in the UK200 Group Property & Construction Bulletin, July 2015.

One of the questions constantly posed by new property investors is – what structure should I use? Should I own properties personally (or, where joint investors are involved, in partnership)? Through an LLP? Or should I invest through a company?

It would be nice if there were a simple answer. Sadly, there isn’t. This is a case where one size definitely doesn’t fit all. Let’s look at the pros and cons below.

Personal ownership

• This may make raising finance easier and cheaper – generally banks are happier lending to individuals than to companies, and often at lower rates

• If you want in future to dispose of the property and have access to the cash personally, it is likely to be both simpler and cheaper to do so – if the property is sold at a gain there is just one “tier” of Capital Gains Tax, at rates between 18% and 28%, and no tax at all on the first £11,000 of so of gains (assuming that you have no other gains in the year). Also, if your eventual plan is eventually to leave the UK permanently, gains on commercial property made after you leave are not normally subject to UK CGT at all – but don’t overlook the possibility that gains may be taxable in your new host country. From 6 April 2015, gains on residential property remain taxable in the UK even if you are not resident here.

• The main disadvantage of personal ownership is that all rental profit is chargeable to tax at your marginal rate of tax. And that includes any profit that is ploughed back into repaying capital on buy-to-let loans: while interest is tax-deductible, capital repayments aren’t

• Where properties are owned jointly (whether in partnership, LLP, or simple joint ownership) each joint owner is taxed on his or her share of any income or capital gain. Where property is held in the joint names of a husband and wife (or civil partners) the default rule is that for income tax (but not CGT) purposes the property is assumed to be owned in equal shares and income is taxed accordingly unless the true beneficial ownership is different and an election is made to be taxed according to that true ownership. This can give some useful planning opportunities.

• Splitting ownership with a spouse or civil partner, and thus potentially doubling up on personal; allowances, tax bands and CGT exemptions can be tax-efficient. But if you are planning to do this, it’s sensible to do it from the start. Although you can transfer an interest in a property to your spouse or civil partner without worrying about CGT or IHT, there is no equivalent exemption from Stamp Duty Land Tax. So if consideration passes or is deemed to pass (as it normally will if property is transferred subject to a mortgage debt) SDLT will need to be considered.

Company ownership

• The big attraction of holding property in a company is that income is taxable at Corporation Tax rates (currently 20%) rather than Income Tax rates of up to 45%. This can be particularly attractive where cash has to be used to repay borrowings: debt can be repaid much faster of 80% of profit is available to do so rather than 55%. Remember however that in some senses the lower rate of Corporation Tax is more like a tax deferral (albeit potentially a very long-term one) than an outright saving: if you want to get your hands on the cash personally there will normally be further tax to pay.

• The CGT position for companies is different from that of individuals in three ways. First, tax is payable at a flat 20%; second, the base cost is uplifted for inflation (which, although hardly relevant at current rates, has in the past made a significant difference and may do so again); and companies do not get any annual exemption. So for small gains the tax charge in a company will be not much less than for an individual and may be more: for larger gains a company is likely to have a lower tax cost. But that is not the end of the story: as with income, if you want to access the gain personally, there will be further a further level of personal tax to pay which, when taken together with the tax at the company level, makes extracting capital gains from a company a comparatively expensive exercise.

• One area in which companies can give great flexibility is in sharing ownership. Personal co-ownership of properties may be legally complex, especially where co-owners fall out as to the management of the property. Giving minority stakes, or perhaps preference shares, in a property-owning company can be a satisfactory way of effectively shares the benefits of ownership while keeping effective control with the shareholder holding the controlling interest in the company.

So: the decision whether to hold property directly or via a company is not necessarily a straightforward one. “You pays your money and you takes your choice”.

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