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As a landlord, if you have children, one of the questions that will undoubtedly cross your mind is how you can leave your property wealth to next generation in a tax efficient way.
One of the advantages of owning property in a limited company is that it can offer a way for you to pass on your property wealth and mitigate Inheritance Tax. This could be achieved by including your children in the company’s ownership structure by setting it up as a Family Investment Company (FIC).
A FIC is a private company owned by family members, which can be used as a long-term investment strategy for passing assets on to your children and potentially mitigating future Inheritance Tax. This is achieved by setting up a limited company with a tailored share structure that assigns different shareholder classes and rights, so that you can protect your assets for the next generation.
Sole Name
A landlord owning property in his own name will be subject to income tax on the taxable rental profit which for a basic rate taxpayer is charged at 20%. Where the receipts in a tax year are £150,000 or less the cash basis will apply. This means rental income and the associated expenses are accounted for when they are received or paid out as opposed to when they are incurred.
When using the cash basis there is no need to account for debtors or creditors.
Up to 5 April 2023, the basis period reporting rules applied. This means your reported profits according to your business accounting year end date within the relevant tax year (between 31 March to 5 April the following year).
From 6 April 2023, the new tax year basis applies. This means you will need to report profit up to the tax year end, even if your accounting year ends at a different time.
The tax which is payable based upon the rentals profits is payable by 31 January following the end of the previous tax year e.g. tax payable for rental profits in the tax year 5 April 2024 is payable by 31 January 2025.
If the property income is less than £1000 per annum there is no requirement to declare or pay tax on the income.
In addition to income tax on profits Capital Gains Tax (CGT) may apply when a property is disposed of by way of a sale, gift or transfer. To calculate any potential CGT a calculation needs to be done to identify the difference between the sale proceeds or market value (in the case of a gift or below market value transfer) and the original cost and any improvements. If there is a gain on residential investment property this is charged to CGT at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.
Any investment properties held will form part of your estate for Inheritance Tax (IHT) purposes. No IHT is payable where the estate value is less than £325,000. There is another £175,000 available in respect of a main residence known as the Residential Nil Rate Band.
Joint Owners
There are two ways of owning property ie. legal or beneficial.
Legal ownership refers to the registered owners name for the property and beneficial ownership which refers to who is entitled to any income and or gains.
The same person will often be both the legal and beneficial owner. Where there are joint owners they will be taxed on the rental profits according to their beneficial interest in the let property. In the case of joint interests these will be held as joint owners, or tenants, or tenants in common.
Declaration of trust
It is possible for beneficial owners to transfer all or a part of their share by making a declaration of trust to another person. In the case of married couples or civil partners an election is required by HMRC on Form 17.
For a more detailed explanation please visit What Is A Declaration of Trust? | UK Landlord Tax
The option of reallocating beneficial ownership can reduce the tax burden where one owner is paying tax at 40 or 45% and another owner pays tax at 20% or not at all.
It should be borne in mind that where there is a mortgage on the let property the transfer of beneficial interest can potentially give rise to a charge to Stamp Duty Land Tax.
