Ways to Hold Property in the UK: A Simple Guide

Holding Property in the UK: A Simple Guide to Ownership Structures

When purchasing property in the UK, individuals and companies have several options for how to hold that property. Each method has its own benefits and drawbacks, especially when it comes to tax efficiency and Capital Gains Tax (CGT). Here’s a simple guide to the most common ways to hold property in the UK:

1. Holding Property as an Individual

This is the most straightforward way to own property. As an individual, you buy the property in your name and have complete control over it.

Pros:

Simplicity: It’s easy to manage and doesn’t involve setting up any complex structures.
Personal Use: You can use the property for personal purposes, such as a family home.
Capital Gains Tax (CGT) Exemptions: If the property is your main residence, you may be exempt from CGT when you sell it.

Cons:

Higher Tax Rate: Any rental income you receive will be subject to income tax, which can be up to 45% for higher earners.
CGT on Second Properties: If you sell a second home or investment property, you may face CGT at rates of 18% or 28%, depending on your income bracket.
Inheritance Tax (IHT): The value of the property is included in your estate, which may lead to inheritance tax charges of up to 40%.

2. Holding Property through a Company

Many investors choose to purchase property through a limited company, particularly for buy-to-let investments.

Pros:

Lower Corporate Tax Rates: Rental income is subject to corporation tax at 19%, which is lower than the top rates of income tax for individuals.
Tax Deductible Expenses: Mortgage interest and other property-related expenses can often be fully deducted from rental income before tax.
CGT Efficiency: When the company sells the property, any gain is taxed at the lower corporation tax rate, rather than the higher CGT rates for individuals.
Limited Liability: Your personal assets are protected, as the property is owned by the company.

Cons:

Dividend Tax: If you want to take profits out of the company, you’ll need to pay dividend tax, which can reach up to 39.35% for higher earners.
Mortgage Challenges: Mortgages for companies can have stricter criteria, higher interest rates, and require larger deposits.
Annual Compliance: Running a company involves additional costs and administrative burdens, such as filing annual accounts and company tax returns.

3. Holding Property through a Trust

Some individuals choose to hold property through a trust, particularly for estate planning purposes.

Pros:

Inheritance Tax Efficiency: Trusts can be useful for managing inheritance tax, allowing you to pass property to beneficiaries in a tax-efficient manner.
Asset Protection: Trusts offer a layer of protection for assets, potentially shielding them from creditors or divorce settlements.

Cons:

Complexity: Trusts can be complicated to set up and manage, often requiring professional advice.
CGT and Income Tax: Trusts are subject to CGT and income tax at rates similar to those for individuals, though some reliefs may apply.
Ongoing Costs: There are ongoing administrative and legal costs associated with maintaining a trust.

Tax Efficiency and Capital Gains Tax (CGT)

Individuals: When you sell a property that is not your main residence, you may be liable for CGT. The rates are 18% for basic-rate taxpayers and 28% for higher-rate taxpayers. Main homes may qualify for Private Residence Relief, exempting them from CGT.

Companies: Companies pay corporation tax on any gains made from selling property, which is currently 19%, lower than the individual CGT rates. However, when profits are distributed as dividends, additional taxes apply.

It is advisable to seek professional legal and tax advice tailored to your individual circumstances when holding property in the UK, whether as an individual, through a company, or via a trust.

Conclusion

The way you hold property in the UK depends on your goals, tax situation, and whether the property is for personal use or investment. Holding property as an individual is simple, but potentially less tax-efficient for investment properties. Holding property through a company can reduce income and CGT burdens but comes with additional costs and complexities. Trusts offer estate planning benefits but are more complicated to set up and maintain.

Professional advice can help you navigate property law, tax implications, and structuring property holdings efficiently.