Building a property portfolio can be an extremely exciting way to build wealth for yourself or your family; property is one of the most profitable asset classes.
Every property investor needs to be aware of the substantial tax charges associated with property investment, especially for those who have failed to put a tax plan in place prior to purchasing investment property.
There are several ways to go about setting up your portfolio, but it is essential to have the right tax plan and structure in place to drastically reduce your tax bill and achieve a profitable property portfolio.
Whether your end goal is to access funds to create the initial property portfolio, or simply to reduce your tax liabilities when investing in property, there are options available that could save you tens of thousands of pounds over the life of your property portfolio.
Ways to buy investment property:
There are currently three core ways to buy investment property:
1. Personally – in your own name
2. Via your trading company
3. Using a Family Investment Company
Whilst buying investment property in your personal name may be your first port of call, it can leave you liable for a hefty income tax bill, correlating to your personal level of income tax. Profit from these purchases could therefore mean being charged up to 45% in income tax. Especially since the changes to Section 24 (meaning landlords no longer benefit from the previous mortgage relief of up to 45%), it is no longer as profitable to purchase investment property via an interest-only mortgage. As it stands, landlords can only claim relief at the basic 20% rate. So, all in all, buying investment property personally is not the most tax-efficient route in most cases.
By comparison, buying investment property via your trading company mitigates the impact of the changes to Section 24, and is certainly an overall better alternative for most property investors. Being liable for Corporation Tax, even at its higher level of 25%, would still leave you better off. However, there are strict HMRC rules surrounding investing company profits. Hold or invest too much excess company cash and you run the risk of becoming an investment company, rather than a trading company. This would then mean your company would lose its Business Property Relief and could incur a 40% tax penalty.
The Family Investment Company
The most tax efficient option, using a Family Investment Company, makes it possible to protect your trading company from this risk and ensure the most optimum tax position.
A Family Investment Company is the ideal vehicle for starting your property portfolio. You can transfer funds from your trading company into this ring-fenced environment, and invest them in property. Within this structure you can grow your profits, whilst also protecting your assets from Inheritance Tax for your children, should the worst happen.
By transferring company cash into your Family Investment Company and investing through this structure, you can also protect your trading company from inadvertently becoming an investment company, keeping your business from getting tangled up in your investments, thus retaining your Business Property Relief. This also reduces Corporation Tax for your limited company, which frees up more funds for more property investment.
This essential tax planning can drastically reduce your liabilities, helping to create a profitable property portfolio.
Some benefits of a Family Investment Company for your property portfolio:
- 0% Inheritance Tax on existing retained profits
- 0% Corporation Tax on investment profits
- Separates trading business from investments
- Loan funds back to your company immediately
- Invest in property or other asset classes
- Retain Business Property Relief
- Lifetime legacy – never switch structures again
Small Self-Administered Scheme
The Small Self-Administered Scheme (SSAS) is a corporate pension scheme, which, as a company director, you can start at any age; you do not have to be 55 to take control of your pension funds, manage them flexibly, and invest at your own discretion.
It can invest in anything a traditional pension can, but with additional options, such as commercial property, hands-off residential property investments, or investing in your own company.
A SSAS can also have multiple members, including family members, which can serve as another way to streamline inheritance.
Some benefits of using a SSAS for your property portfolio:
- Purchase investment property
- Make hands-free property investments
- Invest in a vast array of other asset classes
- Grow your pension fund by investing in property or other asset classes
- Make loans from your pension fund to your company for any valid business purpose
- Combine multiple pension funds into one pot for greater investment power and control
- Pool pensions with family or colleagues to increase the pot to grow it more quickly
- Ring-fence assets, outside of the estate
- Succession planning and creating a legacy
- Retirement planning on your own terms, to your own timescales
- Reduce Corporation Tax and mitigate Inheritance Tax
- Purchase your business premises and rent them back to the company to grow the pot
Combining these innovative tax planning vehicles
By combining a FIC with a SSAS, you can diversify your property portfolio and invest in a wide range of property, including:
- Hands-free property investment (suited to those with minimal knowledge of property investment and the laws and regulations surrounding, or those looking for minimal time commitment for their property investment strategy)
- Buy-to-let
- Serviced accommodation
- Commercial property
- Residential property
- Land for development
- Purchase of business premises
