Kate Naylor: Tax tips for property investors from a tax adviser-cum-tree surgeon
Tax specialist Kate Naylor offers advice for property investors at all stages of development.
Opportunities and challenges for property investors vary, depending on where they are in their investment and development journeys. Naturally, my discussions with property clients are always rooted in tax, but by understanding their wider circumstances and long-term aims, I can provide the advice that best meets their needs.
It occurred to me recently that providing tax and strategic support to property investors is akin to tree surgery – sowing the seeds, establishing strong foundations, ongoing pruning, hazard assessment and potentially felling or replanting…
Little acorns – starting out
Whether you’re securing your first buy-to-let or have ambitions for significant property development, this is an exciting and appropriate time to explore opportunities.
In a meeting with one client, let’s call her Hazel, she explained her intention to buy a renovation property and her indecision around selling or renting it out.
Our discussion focussed on how to structure the business, options being to hold the property personally, or within a company or partnership. If primary purchases like this could form the start of a bigger property empire, it often makes tax sense to use company structures.
Considering the potential challenge of getting funding for a new company and a new property investor/developer, practical funding considerations may override what appears to be the best tax option.
Think about your property business structure early, and revisit it periodically to sense check whether it’s still fit for purpose, which leads us into the next scenario.
Saplings – growing nicely
Reasonably well-established investors may have rental property portfolios and could also have branched out into development activities. Often, properties destined for sale may have become good rental opportunities, or the market might not have been conducive for sale.
Another client, we’ll name him Rowan, had a mixed portfolio of residential and commercial properties, and property development. His whole portfolio was in one company, not by design, just because he set up a company, got cracking with the properties, became very busy and never looked back. His VAT position was complex as he was developing a range of new-build residential, conversion and refurb interests.
Rowan was concerned about risk, so our discussions had a future focus around protecting the value he was building for retirement and possibly helping family. We explored creating separate companies for the different parts of his business, and whether these should be within a group or standalone separate companies. There were considerable tax and VAT matters to contend with, but Rowan felt more comfortable with his circumstances after our planning.
When talking to investors like Rowan, it can become apparent that some taxes haven’t been considered. The Construction Industry Scheme (CIS) is regularly overlooked. You may be a property investor or even just hold properties for use in your business, but that doesn’t necessarily exempt you from CIS as a deemed contractor.
Then there’s the Annual Tax on Enveloped Dwellings (ATED) which, even if it doesn’t create a tax charge, could grow into an annual compliance headache with some disproportionate penalties if you don’t comply.
There’s a long list of other taxes to consider, including Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT) and 60-day reporting for individuals, VAT, corporation tax, and a new property developer tax.
Mighty oaks – well-established
Seasoned property clients have often amassed a level of wealth and a substantial amount of let property, whether commercial, residential or both.
In discussions with another client, who I’ll refer to as Ash, conversation rotated around how he could step down and enable the next generation to get involved in the business, together with the consequences of his death and how the family might fund the Inheritance Tax (IHT).
Because Ash had a lot of property investment wealth, the planning was crucial, as there would be a substantial IHT bill on his death. Potential strategies for Ash included the creation of special share classes within the company to stop his position getting worse, gifting shares and the creation of a discretionary trust, with a wider review of the overall IHT position.
Property investment and development often means big numbers and the potential for large tax bills, so it’s wise to plan. One size does not fit all, there are many solutions and getting the right one is all about knowing your position and being clear about your aims.
- Kate Naylor is a tax partner (not a tree surgeon) at Sagars – an AAB Group company