In this article we take a look at Property Investment Structures and the three main routes you can take to set up your property investment business.
Individual or partnership?
There are three main routes you can take within this category to set up your property investment business. You could purchase your property as an individual, set up a partnership with someone else or set up a limited liability partnership. A limited liability partnership means you are essentially a partnership for tax purposes, as well as benefitting from an extra layer of protection to guard against liabilities – similarly to a limited company.
Limited Company (Special Purpose Vehicle)
This is where a limited company purchases a property, and you invest in the company as a shareholder. There has been a significant increase in the number of people setting up limited companies specifically to invest in property, generally known as a Special Purpose Vehicle. One of the reasons for this increase resulted from changes to legislation for buy to let mortgage tax relief for landlords. Since April 2017, the way landlords have to declare their rental income has changed dramatically, meaning most will see their tax bills rise significantly.
Landlords trading as individuals or partnerships could find their income artificially inflated as a result of the mortgage interest tax restriction if any of the following apply:
- Your total income falls within the higher rate tax bracket
- You receive working tax credits
- You have experienced a loss of personal allowances
This change in tax relief only affects private landlords – people who own their properties as individuals (or couples), rather than through a business which is why many landlords tend to favour the limited company route.
Which structure should I choose?
There is no one size fits all or single “correct structure” that would be most suitable to your circumstances and investment strategy. You must weigh up the benefits of each and base your decision on the structure that will achieve your short and long-term goals.
Although there are other ways of structuring property investment, such as using a trust, the most common structures for UK residents are to invest as an individual, in a partnership or via a limited company.
Your intentions, short- and long-term plans:
The first thing to consider is what is it you are hoping to achieve with your investment.
- Are you looking for regular income from a single or few properties?
- Are you looking to keep your income in the company or structure and build a portfolio of properties to increase your investment value and use that as a pension pot?
- Or, are you interested in short-term investment into a property? To add value to the property and sell it for profit?
If you are a basic rate taxpayer and want to earn regular property income, it may be more beneficial to own it personally as a buy to let or through a partnership. If you are a higher rate taxpayer, have plans for investing long term and build a portfolio of properties, it may be more beneficial to invest it through a limited company.
Exit strategy
Another thing to consider is your exit strategy, and this will entirely depend on how you initially set up your business. If you own properties personally or as part of a partnership, your exit strategy is relatively straightforward. All you would need to do is sell the property or properties and pay the capital gains tax due.
Your exit strategy will be slightly more complicated if your properties are owned as part of a corporate structure. For example, if you are selling the property or your shares, you will need to decide how to withdraw capital from the company once the properties are sold. You can either liquidate the company or invest those funds into a new venture.
Other factors
Investing in property through a limited company could be a more tax-efficient structure, but there are important factors to consider before settling on that structure. For example, you should consider the Annual Tax on Enveloped Dwellings (ATED) charge that is applied to high-value properties owned by the companies, alongside the financial costs, as there may be fewer lenders to choose from when securing a mortgage loan. If your limited company does not have enough reserves or credit history, your lenders may also see personal guarantees, increasing your individual risk.
Another area that you may want to consider is how much time and money you are prepared to give to your investment. Are you looking to invest in a highly rewarding property in a far-off location and pay agents to look after the property on your behalf? Or, would you prefer to invest in a property closer to home so that you could look after it yourself regardless of whether the investment is highly rewarding or aimed for passive return?
Before deciding which structure to adopt when investing in property, we highly recommend you seek professional advice tailored to your business plans and circumstances.
Fusion Business Services are experts in Landlord Accountancy
For a free and impartial consultation or to discuss how to set up and manage your property portfolio, please give our expert consultants a call on 0800 2294020, or schedule a free consultation for a time that suits you here. We also provide a landlord accountancy service for those who would prefer not to have an SPV (landlord accountancy with self-assessment).
