Financial planning for property investors

The tax landscape for property investors has become less favourable in recent years. Before 6 April 2017, buy-to-let property owners could deduct all buy-to-let finance costs, which often mainly comprise mortgage interest payments, from their income tax liability. But today they can only get a 20 percent basic rate income tax deduction on these finance costs. This effectively means higher or additional rate taxpayers now often face higher tax bills on income from buy-to-let properties.

Owning properties through a limited company can, however, be an effective way to reduce your tax burden. That’s because you pay corporation tax on company profits, and this is charged at a lower rate than the higher rate of income tax (at 40 percent) and the additional rate of income tax (at 45 percent).

Even so the main rate of corporation tax, which is applicable to profits of more than £250,000, rose from 19 percent to 25 percent in 2023. But a small profits rate of 19 percent is still charged on companies with profits of £50,000 or less. And a sliding rate of corporation tax is payable on profits between £50,000 and £250,000.

You should also be aware that, if your company is paying you a personal income, then you could have to pay both corporation tax and income tax. That said, your income would reduce the company’s corporation tax bill, so there is some offsetting here.

Getting your company to pay into a pension scheme for you, out of your income from the company, could offer a potential tax benefit. This is because company pension payments are a tax-deductible expense. So they could reduce your company’s corporation tax liability and employer’s national insurance payments, which might benefit you as a company owner. But HMRC must consider these company pension contributions to be ‘reasonable’.

There are, though, some disadvantages to owning properties through a company. In particular, mortgage rates are typically higher for property owning companies than for individual property owners. You may also have to pay for accountancy services, which might not be necessary for personal property owners.

Moreover, a company can potentially pay higher stamp duty land tax rates on property purchases than an individual owner. This is charged at 15 percent for companies buying residential properties costing more than £500,000, but various reliefs are available depending on what the property is used for (1).

Companies with residential property worth more than £500,000 may also be liable to the annual tax on enveloped dwellings. Properties liable for this tax are revalued every five years and the charge is applied annually. The tax charge varies in line with the valuation band the property falls into, and the charge is higher for higher value bands (2).

So you need to exercise judgement when deciding whether to own buy-to-let properties as an individual or a company and you may want to seek specialist advice here. Even if you do get a tax saving from running a buy-to-let property company, this could be more than offset by higher mortgage interest payments and other costs.

Passing on wealth

Turning to inheritance matters, buy-to-let property is subject to inheritance tax on your death. This is the case even if the property is held within a company structure, as buy-to-let property companies are classed as investment companies rather than business assets. In other words, they form part of your estate just as if they were held in your personal name.

Many landlords are keen to pass on their properties to loved ones. But inheritance tax is charged at 40 percent on estates valued at more than the tax-free thresholds. One way to mitigate this is through whole of life insurance (often known as life assurance).

Whole of life insurance offers a guaranteed payout to beneficiaries on your death. And the payout can be arranged to cover the inheritance tax bill your estate would face. But the fact that the payout is guaranteed and may be substantial means this can be a particularly costly type of cover.

Alternatively, you may consider transferring some of the shares in your property company to your children during your lifetime. Such transfers can be free of inheritance tax as long as you live for seven years after the transfer. Even so, gifting these shares to children would be classed as a sale and you could be liable for capital gains tax.

In addition, as a property investor, you might need to consider other things such as:

• Home improvement loans

• Funding for auction property purchases

• Commercial mortgages

• Financing to cover short-term costs.

The need for diversification

Property investors, unsurprisingly, can have significant investment in one type of asset: property. And the property market has its ups and downs, just like any other market.

At Schroders Personal Wealth one of our key principles is diversification, or not having all your eggs in one investment basket. Different types of investment assets respond differently to different economic and market conditions. Holding a range of investment assets can help cushion your overall portfolio from the impact of these conditions.

We can help you select a portfolio of investments that can reduce your overall investment risk by investing in non-property holdings, such as equities (shares) and bonds. In addition you could increase the diversification of your property holdings themselves, perhaps by investing in different property sectors and regions. You could also consider gaining exposure to different types of tenancies.

At Schroders Personal Wealth we are financial planners. So we can’t help you select property purchases, arrange property funding or confirm whether you’d be best off owning properties as an individual or within a company. But we can help you understand the financial planning implications of the options open to you and we can hopefully help safeguard your overall financial wellbeing.

So why not begin with a free, no obligation conversation to understand if our service is right for you? There are no hidden fees or charges, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.

Sources:

(1) Gov.uk (www.gov.uk), ‘Stamp duty land tax: corporate bodies’, 28 October 2022.

(2) Gov.uk (www.gov.uk), ‘Annual tax on enveloped dwellings’, 22 November 2023.