Residential property ownershipPosted 2022 by Jane L
By Tom Annat
A question often asked of tax professionals is in relation to property ownership and how this should be structured. This could be in relation to existing property or a proposed future purchase. The taxation of property income or gains can vary significantly depending on ownership and property type. Here we highlight some of the pertinent areas which should be considered for residential property ownership.
Legal and beneficial ownership
The legal owner of property is the person who owns the legal title of the land. In contrast, the beneficial owner is the person who has the right to use or occupy the property and enjoy any income or gains derived from it. The beneficial owner may not always be the legal owner and the opposite can also be true.
The taxation of property follows the beneficial ownership. Therefore, it is very important to consider who that beneficial owner is. It may not always be the person you think it is or would like it to be.
Tenants in common or joint tenancy
An important consideration for couples purchasing property is whether ownership should be as tenants in common or as joint tenants. As joint tenants, both owners jointly own the whole property equally. In contrast, as tenants in common, each will own a specific identifiable share in that property. These contrasting ownership arrangements can have an impact on taxation as well as for a person’s estate on death.
Under the ‘survivorship’ rules, where a joint owner dies, their joint share automatically passes to the other joint owner(s). This is significant because it will not be possible for the deceased to pass their share of the property to a named beneficiary in their will. For property held as tenants in common, the deceased owner would be able to leave their share to a named beneficiary.
The tax position for joint owners may be particularly relevant for married couples. For married couples, property income and gains are automatically taxed on a 50:50 basis. To alter this, the joint tenancy must be severed by Deed. This could have important tax consequences where you have one spouse paying higher rates taxes and the other is a non-taxpayer or basic rate taxpayer. The position for unmarried couples is not the same and profits can be allocated in the proportion agreed by the owners.
In recent years there has been an increased interest in owning residential property within a company. In part, this could be as a result of the tax relief restrictions on mortgage interest which came into force in 2017. These restrictions do not apply to companies. Further, we have seen a growth in popularity of family investment companies. Historically trusts have been the ‘go to’ structure for family tax planning. However, trusts can lack flexibility and tighter regulation has increased the tax and administrative burden for this type of planning. As such, family investment companies are considered a viable alternative to trusts.
Where profits are fully retained within a company, tax rates will generally be lower than when owned directly. In contrast, if profits are fully withdrawn via a salary or dividends to shareholders, then the overall tax benefit may be reduced. However, tax planning opportunities may arise so that personal allowances of basic rate or non-tax paying shareholders can be utilised.
Stamp duty (SDLT)
Stamp duty is chargeable on residential property purchases above £40,000. The amount charged is based on a progressive scale relative to the property value. A 3% surcharge is added to the basic rates where there is a purchase of additional property or properties.
The acquisition of residential property by companies will generally be taxed under the higher rates of SDLT (3% surcharge). Unlike for individuals, the additional 3% higher rate applies for any purchase of residential property and not just for additional purchases.
A 15% flat rate SDLT charge may apply to purchases of residential property by companies where the consideration is for more than £500,000. However, there are exemptions available from this rate and, where an exemption applies, the 3% higher rates will apply.
Companies that are non-UK resident must pay a 2% surcharge on residential purchases above £40,000.
Relief for multiple properties
Transactions concerning multiple properties may qualify for ‘relief’ that could reduce the amount of SDLT payable. Multiple dwellings relief (MDR) allows for SDLT to effectively be charged on an averaged basis for each property. If 6 or more properties are being purchased at the same time, the purchaser can opt to either pay ‘non-residential’ rates of SDLT or to pay higher rates with multiple dwellings relief applied.
Transfer of existing property into a company
The transfer of property from individual to corporate ownership is a deemed disposal for capital gains tax purposes. As such, any proceeds received are ignored and replaced by the market value for the purpose of capital gains tax.
This type of transfer is also a chargeable transaction for SDLT purposes and would fall within the SDLT regime discussed above.
These two taxing regimes could result in a significant upfront liability when moving personally owned property into a company. Advanced tax planning is therefore essential.
Annual Tax on Enveloped Dwellings (ATED)
In an attempt to make holding residential property within a corporate structure less attractive, the ATED regime was introduced in 2013. This legislation imposes an annual charge on companies holding residential property valued at more than £500,000. Various reliefs and exemptions are available. For example, property let to a third party on commercial terms would be exempt from the charge. However, the exemption must be ‘claimed’ via a submission of an annual return to HMRC.
The next step
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