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Reading Property Investors Network: Q & A – by Andy Scott

I was recently asked to speak to the Reading PIN meeting as part of their expert panel. Details of the next event are here

Here are details of the questions and answers:

Pension Reform what impact do you expect the pension reform to have on the housing market?
I remember the last pensions reform A Day in April 2006. It was originally intended to relax pension investment and allow SIPPS to invest in assets such as residential property and fine wines. Large insurance companies successfully lobbied the government arguing that the proposed changes would lead to unwanted house price inflation. This stopped pension funds from owning residential properties.

Although in theory an individual now has access to their whole pension fund at age 55 this does come at a price. Only 25% of the fund is tax free and the remainder is subject to tax.

For example if we say an individual’s annual taxable income is £35,000 and this person has a pension pot of £100,000, they will pay tax of £4,880 a year on their income.

If they decide to take their pension pot of £100,000 in one go they will receive £25,000 tax free but the remaining £75,000 will be taxable.

The tax on the £75,000 is £30,539.

This gives after tax £69,461 for property investment.

People who invest in pensions are naturally prudent. It is a long term savings vehicle.

Personally I believe some pension money will be used to invest in property. However it may just be the 25% tax free lump sum. This is the same as the old rules and it is just using money that has already been earmarked for property investment. I cannot see a significant effect on the market.

If there is, the winners will be HM Government with the increased tax revenues!

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I own 10 properties and they’re currently owned individually in my own name, is there an advantage to put them in a company name? What are the implications of doing so?
This answer may depend on how much borrowing you have on your portfolio. Will the lender be happy to lend money to your limited company? This may be your first problem.

You will also find that there will probably be professional fees to pay dealing with your limited company. Will the cost of professional fees negate any tax saved?  You will need to file statutory accounts with Companies House and Corporation tax returns with HMRC. There are penalties to pay if you miss any of the filing deadlines.

You need to consider here the following taxes:

SDLT– Will there be SDLT to pay on the transfer of the properties to the Limited Companies?

Income tax – How much will you actually save by making the transfer? The company will still pay tax at the rate of 20% on the rental income. You may pay further income tax on any income you extract from the company.

Capital Gains Tax – The transfer of the properties to the limited company may give rise to a Capital Gains tax bill. The transfer will be at current market value as the transfer is between connected parties. You will pay tax on the difference between the current value of the properties and the price you originally paid. The annual capital gains tax exemption is £11,100 and any gains above this figure are taxed at either 18% or 28%. The amount of tax payable depends on your level of income and the total amount of gains in the tax year.

To avoid the Capital Gains Tax it may be possible to transfer the properties in exchange for shares in the new limited company; this is based on the judgement in Elizabeth Moyne Ramsey v HMRC [2013] UKUT 266 TC.

I would seek HMRC clearance before undertaking the transfer. It would be best to seek professional help with this incorporation and clearance.

Corporation tax – You will pay Corporation tax on the rental income generated by your new company. This will probably be at 20%.

In short it does depend on how much income is generated by your portfolio and I think you should take professional advice.

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I’m planning to purchase 3 buy to lets and I’m also buying to flip, should I set up a company for the flips to reduce my tax?
If you buy a property with the intention of making a quick profit or gain, then the chances are that the profit or gain will be subject to Income Tax as opposed to Capital Gains Tax.

This would mean that a flip in your own name would be subject to Income Tax and Class Four National Insurance. The amount of tax payable will depend on how much profit you make and the amount of your other income. You could be paying tax at 40% or higher rates if you carry out the development in your own name. You will need to advise HMRC of the commencement of the business.

If you carry out the flip through a company then the company will probably pay 20% tax on the profit. There may be additional personal income tax to pay if you extract the net income from the company.

The company works well if you are using the profit to fund future development projects.

It is worth seeking professional advice and have someone crunch the numbers for you to see which scenario gives you the best tax result.

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What is the impact of the unwinding quantitive easing?
I don’t know I am not sure anyone does. May I pass and watch this space?

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The new incentive ISA for First Time Buyers (FTB),  will this help boost the FTB market or will we consider to see FTB struggle to enter the market and continue to be outbid by overseas and investment buyers? 

Here is the link to the new guidance, please remember it does not apply until the autumn.

The maximum of government bonus payable under the scheme is capped at £3,000 and this is only paid once the first home is purchased.

I think it is a welcome benefit for FTB and every little helps but I am not sure that an extra £3,000 will help FTBs outbid overseas and investment buyers.

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I’m 62 and have 3 properties I have 2 children what do I need to do to reduce the inheritance tax?

To answer the question fully I would really need more information. I am assuming that the three properties are in addition to the family home. I will answer the question on this basis.

If the question is how do I avoid paying Inheritance Tax (IHT) then it could simply be a question of gifting the properties to your children and then living seven years so that the properties fall outside your estate for Inheritance Tax purposes.

Although it is relatively simple to avoid the IHT there are several other taxes to consider.

The points to consider here are:

  1. If you have purchased the properties to provide income in retirement how will you manage to live if you have gifted the properties and the right to receive the rental income to someone else?
  2. Are the properties mortgaged, will the lender let you give the properties away? If they do let you ‘port’ the loan to the new owner then this may give your children a SDLT bill.
  3. Is there any Capital Gains payable on the gift? If you gift a rental property to your children this may give rise to a Capital Gains tax bill. The transfer will be at current market value as the transfer is between connected parties. You will pay tax on the difference between the current value of the properties and the price you originally paid. The annual capital gains tax exemption is £11,100 and any gains above this figure are taxed at either 18% or 28%. The amount of tax payable depends on your level of income and the total amount of gains in the tax year.
  4. Could you just refinance the properties and give away the additional loan instead.

I think you do need to seek professional advice on this and have someone carry out a full IHT review for you.


Andy Scott

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