How to invest in property tax efficiently

Investment property

Ownership of a second home, buy-to-let, or other property is common these days and for most represents a solid and reliable investment.

 

It is a well-known fact that the UK does not build enough new houses each year and that there are significant supply shortages in certain areas. This creates opportunities for investors looking to capitalise on this excess demand.

 

Investment property provides investors with the prospect of capital growth, which in some parts of the UK in recent years has been very strong, combined with a regular monthly income which, if the property is geared, can be used to service the interest and repay the debt.

 

So, all things considered it can be a great investment. Some may even, rightly or wrongly, view it as their pension.

Hold on a minute, what about tax efficiency?

For all the benefits there are some negatives and one of the biggest problems with ownership of a property (or property portfolio) is taxation.

 

Any realised growth in value will at some stage create a CGT liability and any income is taxable at the highest marginal rate.

 

What’s worse is that simply owning or letting residential or commercial property (either individually or via a property holding company) is considered a non-qualifying activity for the purposes of Business Relief.

 

This means that the value will almost certainly form part of a taxable estate and therefore be liable to Inheritance Tax (IHT).

How can I gain exposure to property in a more tax efficient way?

Whilst some may choose to transfer ownership into a property holding company to avoid personal taxation, this can be expensive in the short-term and will not completely remove taxation.

 

Property trusts are a possible route, but this often involves a transfer of the asset, meaning that the investor loses control of capital and creates a potentially exempt transfer (PET) on the value.

 

What’s less well known is that undertaking residential or commercial property development is a qualifying activity for the purposes of Business Relief and offers full relief from IHT after two years.

 

Similar supply and demand issues in the rental market affect property development, so that investors can generate some attractive returns.

 

    

Capital preservation

For those seeking a capital preservation strategy there are a number of ways to reduce project risk including:

  • Ownership of the title, freehold land or long leasehold
  • Full planning consent
  • Appointment of trusted partners; including contractor and developer
  • Proven local demand
  • Funds held in escrow and released as required to a nominated solicitor
  • Insurance to cover public liability
  • Off-plan sales to recoup capital

 

Stellar’s Directors have been active participants in property development for over 30 years, starting at Close Brothers where they were among the early pioneers of arranging Business Expansion Schemes (BES) and Enterprise Zone Trusts (EZTs) for private investors.

 

Clients participate in residential development within their own personal trading to give investors relief from Inheritance Tax under the Business Relief rules.

Track record

An example of our activities is the successful completion of a residential development project in Milton Keynes in June 2017. Stellar built five detached executive homes within the Walton Grange estate; the development took 18 months to complete and the profit to investors after all costs was 5.47% per annum.

  

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