Ways to invest in UK property investment opportunities: Part 1

Is direct property investment best for you?

One of the most common questions we’ve been asked during the last few months is whether owning properties directly is still the best way to profit from UK property investment opportunities. Mostly, the question has been prompted by the changes to the tax regime and how mortgage interest tax relief is changing.

I wish there were an easy answer, but there isn’t. When it comes to which structure is best for your property investment, it is most definitely ‘horses for courses’. There is no standard answer, because your investment objectives, tax position, personal circumstances, and so on are unique.

Each investment structure has unique characteristics. Whether you’re a new investor or already own a property portfolio, you’ll need to seek advice from your accountant about which structure is best for you. Now, I know how technical accountants and solicitors can get. So, over the course of my next few blogs, I am going to explain the different ways to invest in UK property investment opportunities, in plain English.

In this article, I’ll discuss the most common method of investing in UK property: direct investment. In the following three articles, I’ll look at partnerships, limited liability partnerships, and limited companies. It’s the knowledge you’ll need when you speak to your tax advisor.

Direct ownership of UK property

There are several advantages of owning investment property directly. One of these is that raising financing is usually easier and cheaper than getting a mortgage as a limited company, for example.

Owning property directly is easy to do. Although you should employ the services of mortgage brokers, solicitors, accountants, and other advisors with specific buy-to-let property expertise, buying property is familiar to most people. If you’ve bought your home, you’ll know the basics of investing in a residential property – this simplicity is one of the major benefits of property investment.

Direct property ownership and tax

When you invest in property directly, all taxes will be charged on a personal basis. It means that your rental income is charged at your marginal tax rate. Now here’s one of the major reasons you might decide to consider moving from direct ownership to a limited company or partnership structure:

By 2020, higher rate taxpayers will not be able to claim tax relief on mortgage interest on their marginal rate. Instead of getting full tax relief on mortgage interest, it will be limited to 20%. Higher rate taxpayers could find themselves paying thousands of pounds more in tax every year.

However, it’s not all bad news on tax. When it comes to capital gains tax, directly held investment property benefits from the use of your personal capital gains tax allowance. Currently (2016 and 2017), the annual capital gains tax exemption is £11,100 per person. If you own an investment property jointly with your spouse, the first £22,200 of capital gain is effectively tax-free.

Above your CGT allowance, CGT will be charged at either 18% or 28%, dependent on your marginal tax rate.

In a limited company, you’d be liable to corporation tax on that profit – at the current rate of 20%, you could find yourself paying as much as £4,440 extra in tax should you sell your investment property.

Holding investment properties in joint names

If you own investment properties in joint names (and this includes owning in a partnership structure), you’ll be charged income tax and capital gains tax in the proportion of your shareholding.

If you own property directly as a husband and wife (for instance, as tenants in common), the rental income will be deemed to be split 50/50. The CGT allowances can be used separately.

You can build tax efficiency by owning property jointly and directly. However, if you already own a property and want to transfer a portion to your spouse, you could get caught in a stamp duty land tax (SDLT) trap – the transfer is exempt from CGT and IHT, but stamp duty will still be chargeable.

Direct property investment ownership summed up

Owning investment property directly is relatively easy, and you might be able to double up on your tax allowances when considering income and capital gains tax. Because of the SDLT rules on transfer of assets, you should consider investing jointly from the outset. Having said this, the changes in mortgage interest tax relief may make it more efficient to hold property in the sole name of the spouse with the lowest marginal income tax rate.

As a direct property holder, buying and selling are easier, as is raising finance for investment. Buy-to-let mortgage interest to direct investment property owners is usually charged at a lower rate than it is to limited companies.

As you can see, while direct ownership is the easiest ownership structure for property investment, whether it is right for you (and how ownership between spouses is divided) depends on the answer to a number of questions. Depending on the answers to those questions, it might be more beneficial to hold investment property in a partnership or limited company structure.

My advice is to speak to your accountant before deciding how to structure your property investment – one with specific knowledge and expertise in investment property. If you don’t have an accountant, or you don’t consider yours to have the experience needed, contact one of our team today on +44 (0)207 923 6100– we’ll be happy to recommend a suitable accountant to help you.

In my next article, I’ll look at partnerships as a vehicle for property investment.

Live with passion

Brett Alegre-Wood

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