So far this briefing has assumed that the property is owned by individuals who are liable to income tax and CGT in the UK, which can mean a liability of up to 40% on both income and gains. Obviously some reduction in liability can be created by having joint ownership with individuals who are either not liable to tax or pay at a rate below 40%. Other routes are available to hold property but there are issues which need to be carefully considered.
Rental income in a company will usually be taxed at the small companies rate (currently 20% and then 21% from 1 April 2008). This seems to be attractive when set against a potential 40% rate for an individual. If rents are significant this may be an option to consider although there are additional compliance problems to deal with, not least with Companies Act requirements.
From a tax point of view it must be remembered that income has to be extracted from a company by an individual either as salary or dividend and that this may trigger a tax liability. It is also important to remember that when a property is sold by a company, taper relief is not available. The company can claim indexation allowance based on the cost of the property which may not be as attractive. In addition the gain has to be extracted from the company.
There may be estate planning opportunities to consider in using a trust to hold rented property. Although a trust will be liable to income tax and CGT at a rate of 40%, the assets in the trust may be effectively placed outside any individual’s estate for IHT purposes, which may give some very significant tax savings over a long period.