TLDR;
This video explores strategies for landlords to legally reduce their property tax bills, potentially to zero. It addresses the challenges faced by higher-rate taxpayers, particularly when their income exceeds £100,000, and examines various tax planning options.
- Landlords earning over £100,000 face significant tax implications, including the loss of personal allowance and higher tax rates.
- Transferring properties into a limited company can be a tax-efficient strategy but incurs upfront costs like Capital Gains Tax and Stamp Duty.
- Deeds of Trust and Partnerships offer flexibility in distributing income among spouses or family members to utilise lower tax brackets.
- Incorporation Relief (Section 162) allows transferring a property portfolio to a limited company without immediate Capital Gains Tax or Stamp Duty liabilities.
- Pension contributions made through a limited company can significantly reduce Corporation Tax liability.
- Setting up appropriate share structures within a limited company can mitigate Inheritance Tax.
The High-Income Landlord's Tax Burden [0:52]
Many landlords earning around £60,000 from employment or self-employment, plus £40,000 in property income, face a 40% tax rate on their property profits. This is because mortgage interest restrictions prevent them from deducting the full interest amount. An additional £10,000 pay rise can push them over the £100,000 threshold, leading to a loss of personal allowance, where for every pound earned over £100,000, two pounds of their tax-free allowance is lost. Earning over £125,000 leads to the complete erosion of the £12,570 tax-free allowance, costing an additional £4,500 in tax, and pushes them into the 45% income tax bracket.
Limited Company Transfers: Costs and Considerations [3:41]
Moving a property portfolio into a limited company can be a tax-efficient strategy, but it's essential to consider the upfront costs. Because a limited company is a separate legal entity, transferring properties is treated as an "arms-length transaction," triggering Capital Gains Tax and Stamp Duty. This double tax hit can be substantial and needs careful calculation. While the long-term benefits of lower corporation tax rates may outweigh these costs, the immediate financial impact can be significant. This strategy is best suited for landlords committed to retaining their properties long-term.
Deeds of Trust: Sharing Income with Spouses [5:45]
A Deed of Trust allows landlords to change the beneficial ownership of a property, enabling the splitting of rental income with a spouse. This is particularly useful if the spouse is a basic-rate taxpayer, as it allows them to absorb some of the property profit and be taxed at a lower rate (20% instead of 40% or 45%). For example, splitting £40,000 profit 50/50 between a higher-rate taxpayer and a basic-rate taxpayer results in a £4,000 tax saving, reducing the total liability from £16,000 to £12,000.
Partnerships: Flexible Income Splitting and Estate Planning [8:02]
Partnerships, registered with HMRC, offer greater flexibility in distributing income and are valuable for estate planning. Unlike simply owning property 50/50, a partnership allows for income to be split in any ratio, reflecting the work each partner contributes. This can be beneficial for bringing family members into the business and planning for the long term. For instance, if one spouse does 75% of the work managing the property portfolio, the partnership agreement can reflect this, allowing the basic-rate earner to absorb more of the profit and reduce the overall tax liability. It's important to demonstrate that all partners are actively involved in the business.
Incorporation Relief: Transferring to a Company Tax-Efficiently [11:15]
Establishing a partnership demonstrates to HMRC that the property portfolio is a business, not just an investment, which can unlock Section 162 Incorporation Relief. This relief allows the transfer of a property portfolio from personal ownership to a limited company without triggering immediate Capital Gains Tax or Stamp Duty. The capital gains liability is "rolled over" and only becomes payable if the shares in the company are sold. Schedule 8 Stamp Duty Relief can also be claimed. This strategy is particularly useful for long-term family investment companies.
Pension Contributions: Reducing Corporation Tax [13:59]
Operating as a limited company allows for more significant pension contributions, reducing Corporation Tax liability. Unlike personal pension contributions, there are no restrictions or caps based on net relevant earnings for company directors. Directors can make unlimited contributions into their pension scheme, potentially reducing their taxable profit to zero. This allows for taking a minimal salary to avoid income tax and national insurance while making substantial pension contributions to offset corporation tax profits.
Inheritance Tax Planning: Share Structures and Trusts [16:10]
Limited companies offer opportunities for long-term family planning and mitigating Inheritance Tax (IHT). Setting up multiple share classes, such as "freezer" and "growth" shares, can protect the family's wealth. "Freezer" shares can be restricted to a certain value, with any future growth directed to children's share classes or a trust. This future-proofs the company against significant IHT liabilities. Trusts can also be used, with gift relief available for transferring shares into a trust, although this should be done before the shares increase significantly in value.
Taking Action: Proactive Portfolio Management [22:07]
Landlords should remain proactive and regularly review their property portfolios to identify tax-saving opportunities. Options like Deeds of Trust and Partnerships can be implemented mid-year, and Incorporation Relief can make transferring to a limited company more affordable. Regular "health checks" of the portfolio and proactive engagement with an accountant are crucial. While each landlord's situation is unique, there are always options available to mitigate tax liabilities.