How to minimise tax in a property downturn
Monday, July 19, 2010
| Posted by: Sue Knight
Categories:
Protecting your wealth
| Tags: tax,
tax planning,
CGT,
Sue Knight,
capital gains tax,
property,
assets,
China,
investments,
Dubai,
holiday homes,
partnership,
overseas
After the Dubai property bubble burst, there is speculation that China is next. So whether you are seeking out an expected property boom or simply continuing to hold property, now is a good time for investors to review the structures in which they hold their property investments.
A window of opportunity
With the continued disparity between income tax rates (with a maximum rate of 50% on income above £150,000) and capital gains tax (CGT) (at rates of up to 28%), it is now more important than ever to seek tax advice as the property market starts to recover, to ensure that future returns are not eaten up by the tax take.
Before the property market has fully recovered, property investors have a window of opportunity to ensure they minimise the amount of tax they pay on their investments.
Corporate or personal/partnership structures?
If property is held within a corporate structure, income and capital gains are taxable within the company at corporation tax rates of up to 28% (27% with effect from 1 April 2011). When the investor needs access to the funds, the additional tax payable at that point means that the total effective rate of tax since 6 April 2010 could be 54% or higher for those outside the basic rate band.
Compare this position to an investor holding the property investments personally or in a partnership; any capital gains arising from a sale are currently taxable at only 28% – therefore saving at least 26%.
To put some numbers on this, on a gain of £1 million, the net return to an individual investing through a company could be as little as £460,000, as compared to £720,000 if property is held personally or in a partnership structure.
Non-UK domiciled individuals can defer CGT
Non-UK domiciled but UK resident investors, with an appropriate offshore structure, can defer CGT indefinitely, or until they need personal access to the funds (whether in the UK or outside), so they can benefit from gross roll-up while the funds remain in the structure.
There may also be planning opportunities that enable funds to be brought back to the UK without crystallising a UK tax charge or for funds to be distributed out of the offshore structure, and provided these funds are retained outside the UK, any UK CGT charge can be limited to £30,000.
Act now on property investments
Investors who want to take, or have taken, advantage of depressed prices over the past 18 months or so to expand their portfolio, should take specialist advice now to ensure they pay the lowest possible tax rate on these investments.
Also, shareholders in long-established property companies need to consider restructuring now to ensure any future gains are realised tax efficiently as property prices recover.
Image of holiday homes: © Alex E. Proimos / Flickr, 2009
You might also like:
* How to spot a property bubble
* Act now to beat CGT rises
* More posts by Sue Knight, Director, Private Client, Grant Thornton on protecting your wealth
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