To Own or not to Own – That is the question

Chris Connor

In fairness though there is no one correct answer. There are a number of combinations which may also be determined by the type of property – residential or commercial, farmland, development land etc. Common ownerships options are as individuals, partnership, company, trust or pension scheme. Each one has its own benefits as well as problems, some of which are noted below.

Individuals can own residential and commercial property and invariably will rent these. Commercial consideration should be given to whether the income stream covers the associated borrowing costs and the tax position on the rental income. Also, it is important to consider the life time of the investment. Is it to be held to benefit from short term gains or over the long term. Capital gains tax will invariably be an issue with only Non Business Asset Taper Relief available and capped at 40% after ten years of ownership. If held for the long term, then Inheritance tax is in point and there are no reliefs on residential investment property so the value could be taxed at 40%.

The same is in point where property is held in partnership although where that partnership is husband and wife then there are opportunities that could be maximised. However, in a normal partnership, rents and capital gains are split in accordance with each individuals share. That individuals share of the property is also exposed to inheritance tax should it become an issue.

Ownership via a trust is an area requiring careful consideration, especially with the new trust regime to contend with.

If a company owns property, net profits are liable to corporation tax. Profits are then extracted from the company by various means, some of which are more tax efficient than others.When sold, the company is liable to corporation tax on any gain arising but the company is not entitled to Taper Relief, instead indexation is still applied.

Only commercial property can be owned by a pension scheme (SIPP/SASS). Property can be transferred to the scheme by an individual or a company or acquired by the scheme itself – funds permitting and funding rules permitting. Although there are advantages of using a pension scheme, this must be balanced with the possible loss of flexibility and the need to adhere to pension scheme rules when a member retires and requires a pension!

Much of a professional adviser’s time is spent unraveling property ownership situations that have just happened over time and with no planning. But if you are considering a new acquisition now, time spent looking at ownership issues can save professional fees and tax at later date. It is always possible to alter ownership but given the continuing rise in the property market, tax does become a major stumbling block. Add to this the cost of Stamp Duty Land Tax and possibly VAT if an option to waive exemption has been exercised on the property, the cost of getting it wrong mounts very quickly.

Allied to the above and the commercial viability of property (income and capital) it is vital now that you have a plan/aim for the property that includes financial gains and an ultimate exit strategy. There are pitfalls and it is essential that you take advice from Accountants and Tax Advisors who specialise in the property sector.