{"id":573,"date":"2016-03-10T08:37:51","date_gmt":"2016-03-10T08:37:51","guid":{"rendered":"http:\/\/renovateme.co.uk\/blog\/?p=573"},"modified":"2018-09-07T19:28:00","modified_gmt":"2018-09-07T19:28:00","slug":"property-tax-different-ways-acquire-investment-property","status":"publish","type":"post","link":"https:\/\/renovateme.co.uk\/blog\/property-tax-different-ways-acquire-investment-property\/","title":{"rendered":"Property Tax: Different ways to acquire and own investment property"},"content":{"rendered":"

When UK resident investors are considering how to hold new investment property acquisitions the main options available are to hold the property personally, via a partnership or in a company. There are various advantages and disadvantages to each approach.<\/p>\n

Personal ownership<\/strong><\/em><\/p>\n

Owning a property personally will generally be the simplest option. With regard to the ongoing tax treatment:<\/p>\n

\u2022 Rental income<\/strong> – The rental profits will be taxable at the owner\u2019s marginal income tax rate, potentially at up to 45%. To the extent any borrowing has been used to acquire the property then the new restriction on finance costs will apply from 6 April 2017. See my previous article for further details regarding these rules http:\/\/renovateme.co.uk\/blog\/property-tax-new-rules-finance-costs-deductions-buy-let-landlords\/<\/p>\n

\u2022 Tax on disposal<\/strong> \u2013 After deduction of any available CGT annual exempt amount (currently \u00a311,100) any gain arising on the property will subject to capital gains tax (\u201cCGT\u201d) at either 18% or 28% depending on the individual\u2019s marginal income tax rate.<\/p>\n

Ownership through a Partnership<\/strong><\/em><\/p>\n

Where property is owned jointly with one or more persons, joint letting in itself does not make the activity a partnership. In particular to qualify as a partnership, HMRC consider there must normally be a significant amount of additional services provided and a similar degree of organisation to an ordinary commercial business. Should the operation be considered a partnership, the ongoing tax treatment is as follows:<\/p>\n

\u2022 Rental income<\/strong> \u2013 Each partner will be subject to income tax on their share of rental income allocated to them under the partnership agreement. As above, to the extent any borrowing has been used to acquire the property then the new restriction on finance costs will apply from 6 April 2017. It is important to note that any income profits or losses that arise under the partnership cannot be aggregated with any personally held investment properties.<\/p>\n

\u2022 Tax on disposal<\/strong> \u2013On a disposal of a property each partner will be taxed on the share of the gain allocated to them in accordance with the partnership agreement. Each partner will be taxed on the gain at a rate of 18% or 28% rate depending on their marginal income tax rate.<\/p>\n

Ownership through a UK company<\/strong><\/em><\/p>\n

Another option will be to own the property via a company.<\/p>\n

\u2022 Rental income<\/strong> \u2013 The company will be subject to corporation tax on the rental income, currently at a rate of 20% (due to drop to 18% from 1 April 2020). NB to the extent any borrowing has been used to acquire the property then the new restriction on finance cost will not apply to companies.<\/p>\n

\u2022 Tax on disposal<\/strong> \u2013 Any gains that arise on a disposal of the property will also be subject to corporation tax. The company will be entitled to deduct indexation allowance against the disposal proceeds to allow for inflation.
\n\u2022 Extraction of funds<\/strong> \u2013 Further tax maybe due on the extraction of rental profits from the company.<\/p>\n

Other matters to consider<\/strong><\/em><\/p>\n

A partnership or corporate structure will have annual obligations, such as accounts and annual returns, which will have an annual cost associated with them and also initial set up costs.<\/p>\n

An Example<\/strong><\/em><\/p>\n

Consider the following example – Joe is a higher rate tax payer who wishes to acquire an investment property which will receive rental income of \u00a330,000 per year. He will not be funding the acquisition using borrowing.<\/p>\n

Personally owned Partnership Corporate Structure (post 6 April 2016) with dividends being extracted Corporate Structure (post 6 April 2016) with no profits being extracted
\nTax on rental profits of \u00a330,000 Income tax at 40% = \u00a312,000 Income tax @ 40% = \u00a312,000<\/p>\n

Corporation tax @ 20% = \u00a36,000 Corporation tax @ 20% = \u00a36,000
\nTotal profit after tax \u00a318,000 \u00a318,000 \u00a324,000 \u00a324,000
\nTax on dividends N\/a N\/a \u00a324,000 dividend less \u00a35,000 annual allowance = \u00a319,000 taxable
\n\u00a319,000 @ 32.5% tax = \u00a36,175 N\/A
\nTotal tax on extraction \u00a312,000
\n\u00a312,000 \u00a312,175 \u00a36,000<\/p>\n\n\n\n\n\n\n\n
 <\/td>\nPersonally owned<\/strong><\/td>\nPartnership <\/strong><\/td>\nCorporate Structure (post 6 April 2016) with dividends being extracted<\/strong><\/td>\nCorporate Structure (post 6 April 2016) with no profits being extracted<\/strong><\/td>\n<\/tr>\n
Tax on rental profits of \u00a330,000<\/strong><\/td>\nIncome tax at 40% = \u00a312,000<\/td>\n <\/p>\n

 <\/p>\n

Income tax @ 40% = \u00a312,000<\/p>\n

 <\/p>\n

 <\/td>\n

Corporation tax @ 20% = \u00a36,000<\/td>\nCorporation tax @ 20% = \u00a36,000<\/td>\n<\/tr>\n
Total profit after tax<\/strong><\/td>\n\u00a318,000<\/td>\n\u00a318,000<\/td>\n\u00a324,000<\/td>\n\u00a324,000<\/td>\n<\/tr>\n
Tax on dividends<\/strong><\/td>\nN\/a<\/td>\nN\/a<\/td>\n\u00a324,000 dividend less \u00a35,000 annual allowance = \u00a319,000 taxable\u00a319,000 @ 32.5% tax = \u00a36,175<\/td>\nN\/A<\/td>\n<\/tr>\n
Total tax on extraction<\/strong><\/td>\n <\/p>\n

\u00a312,000<\/p>\n

 <\/td>\n

\u00a312,000<\/td>\n\u00a312,175<\/td>\n\u00a36,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Summary<\/strong><\/em><\/p>\n

When setting up a new property investment business a company may well have advantages if the long term business plan is for profits to be reinvested in the business to promote future growth enabling the business to pay corporation tax rates on profits and to benefit from the finance cost deduction from rental profits if the intention is to using borrowing to fund the acquisition. However, with such a structure, the extraction of rental profits will also need to be considered in comparison to owning the property directly \u2013 particularly in light of the increased dividend tax rates coming into effect from 6 April 2016.<\/p>\n

It is not yet clear to what extent companies will be impacted by the new SDLT rules on buying second properties announced in the Autumn Statement. To the extent companies are affected by these rules, then the new SDLT rules will be another factor to be considered.<\/p>\n

Whilst every effort has been made to provide information current at the date of publication, tax laws around the world change constantly. Please note that this article has been produced based on information contained in the Autumn Statement announcement documents and prior to any draft legislation being produced. Accordingly, the material should be viewed only as a general guide and should not be relied on without consulting your local KPMG tax adviser for the specific application of a country\u2019s tax rules to your own situation.
\nIf you need assistance with any related matters, please do e-mail Simon at simon.johnson@kpmg.co.uk.<\/p>\n","protected":false},"excerpt":{"rendered":"

When UK resident investors are considering how to hold new investment property acquisitions the main options available are to hold the property personally, via a…<\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[172],"tags":[73],"yoast_head":"\nProperty Tax: Different ways to acquire and own investment property -<\/title>\n<meta name=\"description\" content=\"Simon Johnson discusses property tax, specifically the different ways to acquire and own investment property.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/renovateme.co.uk\/blog\/property-tax-different-ways-acquire-investment-property\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" 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