In recent years, the ownership of UK residential property has been affected by a number of new tax measures. For those investing in residential property, the choice of ownership structure needs to be reconsidered as the tax changes can apply differently to corporate and personal ownership.
Recent tax changes which impact investment in residential property include:
The combined effects of these changes can significantly increase the tax costs of acquiring, holding and disposing of residential properties.For most tax purposes, property is residential if it is used or suitable for use as a dwelling.
Some residential property investors are now considering investing in commercial rather than residential property. Very broadly, commercial property in this context is any property that is not suitable for use as a dwelling. Such properties are not affected by the 3% SDLT surcharge, or the 28% CGT rate, or non-resident CGT for non-UK resident investors. The above restrictions on tax deductibility of finance costs are also not applicable to commercial property investments.
Clearly investment in commercial property has a range of different investment considerations compared to residential property, besides tax.
The ownership structure for investing in residential property may need to be reviewed in light of the recent tax changes. In many cases, corporate ownership may now be more cost effective as the higher rate of CGT does not apply to companies, although restrictions on corporate tax deductions for finance costs need to be taken into account.
However, there is no ‘one size fits all’ structure and there are at least two sides to the story. Whilst in some instances the use of a company to invest in residential property will be attractive this will need to be weighed against the potential pitfalls, such as:
Existing residential buy-to-let landlords thinking about the use of a company need to be aware of potential CGT and SDLT costs of moving their property portfolio into a company. However, in some circumstances tax reliefs may be available. Again there are other considerations, such the rights of tenants and secured lenders.
As with every property acquisition, careful thought needs to be given to the commercial objectives and the specific circumstances. Anyone already holding property or considering an acquisition should take professional tax advice as the tax rules are complex and the potential tax costs could be significant.
Find out more on our UK Residential Property page here
Paul Day. Senior Manager, Private Client
Lisa Oakes. Director, Corporate tax