Landlords warned against the use of tax avoidance schemes.

HMRC recently issued guidance Spotlight 69 highlighting a tax avoidance scheme used by landlords where a rental business would be transferred into a Limited Liability Partnership (LLP), with the LLP then put into Members’ Voluntary Liquidation (MVL).

The purpose of the scheme was to reduce Capital Gains Tax (CGT), Stamp Duty Land Tax (SDLT) and Inheritance Tax (IHT), but HMRC believes the scheme fails under various tax rules and regulations, leading to most of these taxes now becoming due.

HMRC’s advice to anyone using such a scheme is to withdraw from it and settle their tax affairs, by contacting HMRC. Stop notices have also been issued to promoters of the scheme.

This recent development re-emphasised the importance of receiving specialist tax advice from experienced property accountants before making decisions in respect of tax planning on your investment properties.

Property tax planning is important for many reasons, including the following:

·        Getting the structure right from the start

The key to property tax planning is to get advice early on, ideally when purchasing your first or next property. By doing this, you can be advised on the tax implications of different ownership structures, such as owning property personally or via a limited company, allowing you to choose the most tax efficient structure for you.

·        It can be costly if you don’t get the right advice

If your portfolio is structured in a way that isn’t tax efficient, not only could you be paying more tax on the rental profits than you need to, but there could also be significant Stamp Duty and Capital Gains Tax implications on transferring properties to a more tax efficient structure. Triggering these taxes will often outweigh any potential tax savings on the rental profits in changing the current ownership, so it’s important to get this right from the outset. There would also be finance implications and legal costs in transferring properties between personal and company ownership to consider.

·        Companies and individuals are taxed differently

Companies and individuals pay tax on their rental profits at different rates. Companies pay corporation tax on rental profits at a rate of 19-25% depending on the profits made in the year, whereas individuals pay tax on rental profits at 20-45% depending on their total income. There are complex rules for individuals surrounding restricted finance costs, but also income tax implications of drawing your rental profit from a company by way of salary or dividends. The annual compliance costs for a limited company are likely to be greater than for a personally owned property portfolio, as well as the finance costs on purchase and refinance, so it’s important to consider these additional costs, along with the tax implications.

Property tax planning is specific to your circumstances

In addition to the annual tax liabilities and other costs, consideration should be given to your income requirements and whether there are surplus rental profits which are not needed in terms of disposable income. Not only will tax planning look at the short-term tax implications, it will also look at the long term goals and exit strategies to factor in changes, such as planned reduction in income due to retirement or leaving employment to be a full-time landlord.

There is no “one size fits all” approach with tax planning and you should therefore seek advice that is tailored to your specific circumstances.

If you would like to arrange an appointment with one of the tax specialists at Perrys, please contact the property teams at our Sevenoaks or London offices.