Seeking most tax efficient way to rent and develop properties

geco

I currently own two ‘Buy to let’ properties as an individual. I am now trying to work out which is the most tax efficient way of expanding into further Buy To Let properties, and/or moving into property development. I have a few ideas, but do not know if my assumptions are correct, or the best option.

One option is to buy land or a property in my own name, develop it, live in it, then sell it, which shelters me from CGT as it would be my principle residence. I would then use those funds to repeat the process. However, if I would do that repeatedly it may not be acceptable to HMRC. Or would it?

Another option is to start a company, through which to buy and develop the property, and take the profits as dividends whereby I only pay 10% tax. I’m not sure how the sale would be affected by CGT though.

If I would buy more Buy To Lets, should I do that within a company, or as an individual, in order to minimise my tax liability?

If I form a company should I transfer my existing Buy To Lets into it?

Can a single company be used as a vehicle to own Buy To Lets and develop properties simultaneously?

What legal entity should the company be? i.e. Ltd, Sole Trader etc

At the end of the day what I want to achieve is the most efficient management of Income Tax and Capital Gains Tax liability, in a legal manner, whilst ensuring that my assets are safe. Please could someone advise what my best way forward is?

Pennywise

Could be sole trader or limited company depending on your long term plans. Either way has pros and cons.

By the way, corporation tax is 20% not 10%, i.e. the same as income tax, so no tax benefits from rental income profits of one over the other unless you're personal total income would go into higher rate tax bands where a company could help avoid H/R tax if you want to reinvest the rental income rather than draw and spend it on personal things.

Capital gains tax is the big area of differences. A company doesn't get an annual tax free CGT allowance but does still get indexation allowance, but will pay corporation tax at 20%. An individual gets the £10k annual allowance, but doesn't get indexation allowance and pays CGT at 18/28%.

There's no "roll over" relief for domestic properties, so each time you sell and re-purchase, you'll have a CGT charge. A company may be better if you plan to do this as CT is 20% rather than higher rate personal CGT of 28%.

Re living in a house, you'd get away with it a few times but do it too often and HMRC can disallow your PRR claim. You'd probably be OK whilst moving up the property ladder and moving in connection with your job, i.e. stuff that the average Joe Public does, but moving too often will raise suspicions.

If you transfer properties to a company, you'll probably have stamp duty to pay again on the sale/purchase, and it will have to be at market value, so triggers personal CGT.

I'd suggest you put down some concrete plans, i.e. number of properties over time, how often you'd sell and buy, rental incomes, etc., and then get a good accountant to show some forecasts of how things would work out under both options.

Don't forget that tax rules can change twice a year (or more), so today's tax rules and rates may be considerably different to what's in force in say 5, 10, 20 years time when you come to sell, and you may find that today's "optimum" strategy isn't beneficial a few years later.

By the way, the CT rates quoted assume that your proposed company would be eligible for the small company rate of corporation tax of 20% - you may find it liable to the main company rate of 26%, so again, do the research or ask an accountant which is more likely to apply to you.