The best ways to structure your London property investments to minimise tax

The buy-to-let (BTL) model for property investments is a huge source of revenue for millions of investors. Whether privately held or through a limited company, the English Housing Survey reported that almost 29% of all London homes are rented, significantly higher than the UK average of 17%. With every 1 in 3.5 homes in the capital being a rental, investors are usually excited at the prospect of leveraging the high market demand and earning healthy returns.

However, before calculating their net ROI, investors must understand the nuances of property taxes applicable to their London investment. Whether it is buying, selling, letting or inheriting a property, all these scenarios may come with a tax liability, and a detailed understanding of the most efficient property holding structure is crucial to maximising returns by minimising your tax bill.

So, what is the most tax-efficient way to invest in a London property?

Taxation in the UK is complex as it is subject to different rules based on the underlying value of the asset, the income generated from the asset and capital gains made on the asset’s sale. Understanding the dynamic nature of different reliefs and exemptions provided to a diverse range of buyer categories is also essential. Based on personal circumstances and investment strategies, BTL investors can choose to acquire a property in their own name, via a limited company or through a trust.

While you can read more about owning properties through a trust here, most private BTL investors opt for either self-ownership or through a limited company. All property investments in the UK are subject to the following taxes.

Stamp duty land tax (SDLT)

As a London property investor, SDLT is the first tax you must pay when buying a residential asset. While first-time buyers and those shifting their primary residence benefit from certain exemptions and reliefs, BTL investors who already own their home and companies must pay the 5% surcharge levied on purchasing additional properties. The amount of SDLT payable varies on the property’s market price and can go up to 17% for high-value purchases that exceed £1.5 million.

Additionally, overseas buyers face an additional 2% surcharge on their purchases. It is also important to note that limited companies have no relief for first-time property purchases and can attract additional taxes if the property acquired is worth more than £500,000 and not let out based on the rules under Annual Tax for Enveloped Dwellings (AETD).

Income tax vs corporation tax

As an individual landlord, your London property investment will generate rental profits that adds to your overall annual earnings and is taxable as per the income tax bands specified by HMRC. However, if you let properties via a limited company, you will need to pay corporation tax on the profits.

Note overseas companies pay the main rate of corporation tax of 25% on all profits.

While corporation tax rates may seem lower than the income tax bands, double taxation may come into effect when the shareholder of a limited company seeks to extract the profits as a salary or dividend payout and pay a further tax on the distribution. Individuals also enjoy an annual tax-free personal allowance that limited companies do not get. However, companies can have the upper hand when it comes to declaring mortgage interest as an expense as for individuals the interest allowance is restricted to the basic rate which does not apply to companies. Therefore, seeking professional tax advice is necessary when making such decisions.

Capital gains tax (CGT) on property sales

CGT is applicable on the sale of BTL properties in the UK, and the rate varies based on the income tax band of the seller in the case of individual ownership. For BTL companies, this tax is again calculated as a part of the corporation tax and added to the annual tax bill. Individuals also benefit from a tax-free CGT allowance of £3,000 per year.

Note overseas companies pay the main rate of corporation tax of 25% on all capital gains.

Apart from these taxes, properties passed down to beneficiaries after death are subject to inheritance taxes, which are standard (up to 40% above the tax-free threshold of £325,000) for every ownership structure.

How do you choose the right ownership structure?

While each ownership structure has its merits and can benefit investors differently, making the best use of applicable allowances and exemptions will help you minimise your tax bill as an investor. While the benefits extended to individuals may benefit private landlords with capped returns, investors with larger portfolios in higher income tax bands may find the corporate structure more lucrative. Like most things, there’s no one-size-fits-all approach when planning your investments. Therefore, financial and tax planning advice from industry professionals is essential when investing in London properties.

At Benham and Reeves, we bring you the best London properties and offer a comprehensive, one-stop lettings service that includes providing information on tax implications of your investment to help you maximise your returns. Get in touch with us to learn more.