Company and Tax Structuring for a Tax Efficient Business
Property is a highly credible asset class for wealth creation, but it’s essential to consider the tax implications and the most suitable company and tax structuring to optimise your returns. A well-defined business structure can significantly impact your profitability and long-term financial goals.
Effective company and tax structuring can minimise your tax liability while ensuring compliance. With a property investment portfolio, this involves consideration in areas including capital gains tax, property depreciation deductions, and efficient management of rental income. Developing a clear tax plan can help you keep more of your hard-earned money while securing the financial future of your investments.
The Two Types of Property Investor
Typically there are two types of investors, with different aspirations, expectations, and levels of skill and experience.
Intentional (Professional) Landlords
These are the individuals who are serious about property investment. They will often start with one property, but look to grow their property portfolio as a professional enterprise. They will be well prepared, well organised, and strategically minded. They will be more likely to use the pre and post-tax, total return approach to their property business.
Not only that, but their property portfolio will form a considered part of their overall investments and wealth. This would include their ISAs, pension, stocks and shares, and so on.
Their property portfolio will be well balanced and based on a long-term strategy. Intentional landlords are likely to invest in development and support for their business. They may have a sophisticated business model in place. This helps them to pay the right amount of tax and run their business efficiently.
Accidental Landlords
Accidental landlords will most likely have inherited a property and decided to rent it out. They may have moved in with a partner and rented the second property. Or bought a property to rent without a clear long term strategy in place.
They probably have one or two properties, often without a clear business strategy. Accidental landlords are less likely to invest in advice and support. Some only really focus on this when something has gone wrong.
They may be unaware of some of the compliance and tax requirements that come with buy-to-let property. This will be the result of inadequate company and tax structuring at the outset. But they could set themselves up well for the future by taking advice and support earlier.
The 18 Year Property Cycle
The property market is a cyclical sector, cycling over an 18-year period. Working on this principle means that it is possible to scenario plan and run financial and tax sensitivities with some confidence. Take a look at the last 18 years. Property prices have almost doubled.
This means that income tax, corporation tax, and capital gains tax can be forecast to a reasonable degree of accuracy. Of course, unforeseen events can cause markets to fluctuate, and tax rates change. It’s important to understand that a forecast is just that- it’s not something set in stone, and can change.
Focus on long-term planning gives context to short-term taxation, regulation, and economic changes. It means tactics can be employed to deliver the results you want
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If you have any queries about the current tax position of your property portfolio, are starting out and need advice, or would like to find out more about the support that we offer, simply complete your details below
Qualitative Analysis, Business Assets, and Investment Opportunity
One key area that investors often forget to consider is the total investment return net of tax. In other words, what hits your bank account after all costs.
There are two elements to total return.
- Rental income
- Capital return
Each of these should be considered on a gross (headline), net (after expenses), and net of tax (after taxes too) basis.
Successful property investors focus on the total return, which considers buy-to-let property over the long term. Strategic thinking in this way is more effective. It considers the total value to the business of one or many rental properties over a prolonged period. That period can take into account the 18-year property cycle, or several depending on the likely longevity of the business.
This approach considers the short-term value of a property in terms of rental yield. But it also considers the return on investment of property at sale.
FACT OF LIFE: we won’t always own what we own today. We might sell, or die.
Considering this simple fact of life, your property portfolio may pass to family members or your other chosen beneficiaries. The long-term implications of inheritance tax(IHT) and capital gains tax (CGT) could have an impact on your estate, if not planned for.
Qualitative analysis is a technique where we look at the long-term performance and liabilities of your property portfolio. It’s based on a quality approach, rather than the rather narrow short-term forecasting that only considers rental yield. Quantitative analysis can be done too to see the effect in numbers.
It’s a detailed, technical assessment of your property portfolio. It will help you plan for the future and helps you consider your income on a post-tax basis. This approach fits into Hawkhurst Invest’s Investor Starter Pack and looks at some key areas including. It will improve profitability and protect your business from challenging economic events in the future.
- Planning for future property investment beyond a single property
- Buy to let mortgages, terms and conditions, and future-proofing ownership
- Total net of tax yield thinking and planning
We’ll look at the types of properties that could form a property portfolio. That includes buy-to-let, flips, refurbishments, holiday lets and serviced accommodation. Every person has a unique tax position and different properties or mixes of properties may suit different individuals.
Property Portfolio Review ensures that portfolios are structured in the proper way
At Holland Asset Management this approach is incorporated into the Property Portfolio Review designed for professional property investors. You can expect two key benefits from a qualitative analysis:
- Assurance
They can be assured that they are already doing the right things with tax, business structure, and forecasting
- Opportunity
We can demonstrate to investors different ways of achieving their goals to give them the outcomes that they want
The key to successful property investment is to make sure that property portfolios are structured in the proper way
In the short term, clients are provided the information that they need to ask intelligent questions when taxes change. It can also help investors who have reached a decision point. They may have had enough, or they want to leave a legacy for their children for example.
Key areas of support and top tips for Property Investment
- Do you have a sale in progress or about to sell? You may now be required to submit a tax return and pay the Capital Gains Tax within 60 days of completion of the sale. Get all your paperwork. You will be able to understand what your Capital Gains Tax liability will be so that you meet the deadline.
- Support for people living overseas who own property in the UK
- Are you in arrears on your tax bill? HMRC runs a Let Property Campaign. Their early disclosure program means that telling them that you are in arrears before HMRC discovers you will mean lower penalties.
- Support for people living in the UK who own property in the UK
Holland Asset Management works with carefully selected partners to collaborate where specialist tax advice is required.
This collaboration provides significant expertise as part of the network of skills and services for property investors. You can utilise this to develop your property portfolios and achieve your strategic and financial objectives.
