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A potential property investment

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hiriskpaul
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A potential property investment

#75152

Postby hiriskpaul » August 17th, 2017, 2:30 pm

I am considering buying an investment property with my brother and was wondering about HMRC rules over the income. Ideally I want no income at all and I will not do a damned thing other than supply half (or some other proportion) of the capital. My brother will refurbish the property, maintain it, let it and deal with all the hassles. Is this kind of arrangement allowed as far as the HMRC are concerned? i.e. if someone owns half a property which is let, is it ok for all the income to go to the person that owns the other half? I am sure we could do this if we went down the route of forming a ltd company, buying the property through the company and paying my brother through PAYE, but I was wondering if it was possible to achieve the outcome without going down that route.

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Re: A potential property investment

#75163

Postby Lootman » August 17th, 2017, 3:03 pm

About three years ago i was considering buying a property jointly with one of my sons. The idea was that he would run the place and collect all the rents, and I would be a silent partner whose contribution was limited to providing the cash for 50% of the cost, with him borrowing the other 50%.

I asked my accountant the same kind of questions as you did, and basically the answers caused me to abandon that idea. Firstly I would have had to be on the mortgage with him, even thought the borrowing was based purely on his income and I was not going to be making any repayments. And secondly, the income has to be divided up according to the ownership split (50/50 in this case) and I didn't want the complication of reporting the rental income nor did I want to pay tax on that income given that my tax rate is higher than my son's.

So instead I just gave him the money as an "early inheritance". There are probably some clever ways of setting up some kind of company, trust or partnership to own the building. And it may be possible to finesse the distinction between legal ownership and beneficial ownership. But if you do it the simple, obvious way then I believe that you cannot just simply renounce the income in the manner that you wish. The income is imputed to be yours even if you never receive it.

Personally I think that's a ridiculous rule, but that was what I was told. You might want to cross post on the tax board as well.

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Re: A potential property investment

#75179

Postby tjh290633 » August 17th, 2017, 5:07 pm

Is a possible way to set up a company, two shares only, one of which is entitled to dividends and the other not?

Call it a "Capital Share" and an "Income share"? Something like a split IT?

TJH

hiriskpaul
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Re: A potential property investment

#75184

Postby hiriskpaul » August 17th, 2017, 5:28 pm

tjh290633 wrote:Is a possible way to set up a company, two shares only, one of which is entitled to dividends and the other not?

Call it a "Capital Share" and an "Income share"? Something like a split IT?

TJH

Yes, we could do any manner of things like this through a ltd company, including making the company an interest free loan to buy part of the property instead of all capital, then drawing a tax free "income" from repayment of the loan. But there are drawbacks to owning property through a company, so I was really exploring other potential options.

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Re: A potential property investment

#75284

Postby Clitheroekid » August 17th, 2017, 11:34 pm

hiriskpaul wrote:I am considering buying an investment property with my brother and was wondering about HMRC rules over the income. Ideally I want no income at all and I will not do a damned thing other than supply half (or some other proportion) of the capital. My brother will refurbish the property, maintain it, let it and deal with all the hassles. Is this kind of arrangement allowed as far as the HMRC are concerned? i.e. if someone owns half a property which is let, is it ok for all the income to go to the person that owns the other half? I am sure we could do this if we went down the route of forming a ltd company, buying the property through the company and paying my brother through PAYE, but I was wondering if it was possible to achieve the outcome without going down that route.

If you don't want any income from it why are you considering the investment at all?

I had thought it might just be a `do-er upper' where you refurbish and sell on for a quick profit, but that wouldn't involve letting, so it's difficult to see what you will get out of it.

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Re: A potential property investment

#75336

Postby StepOne » August 18th, 2017, 9:36 am

Couldn't you just lend him the money and let him buy the house in his own name?

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Re: A potential property investment

#75341

Postby PinkDalek » August 18th, 2017, 9:46 am

StepOne wrote:Couldn't you just lend him the money and let him buy the house in his own name?


The OP expanded on his intentions when he made a cross post at Taxes. It included:

We both then share in the long term capital gain when we eventually dispose of the property (and I benefit from my brother's improvements).

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Re: A potential property investment

#75403

Postby hiriskpaul » August 18th, 2017, 12:27 pm

I have just come across this, which says what we are trying to do is allowed, but is dated 2011 so legislation may have changed since:

https://www.taxinsider.co.uk/600-How_to ... 90_10.html

Just to be clear, I am expecting a capital return from this - it is not an interest free loan!

Ideally my brother would pay the SDLT as well and I have not seen anything yet to say this is not allowed. The deal will be that my brother pays all costs, bears all the hassle and gets all the income, but does not have to borrow from a bank. My return is pure capital appreciation. When we come to sell, 2 (likely more if we include our wives) lots of annual CGT allowances are available.

My brother already does BTLs and is competent at property refurbishment, so I have no concerns on that score.

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Re: A potential property investment

#75405

Postby StepOne » August 18th, 2017, 12:30 pm

Yes, but that doesn't change things does it? Couldn't half the sale proceeds just be gifted back? And pay CGT if required.

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Re: A potential property investment

#75413

Postby PinkDalek » August 18th, 2017, 12:48 pm

hiriskpaul wrote:I have just come across this, which says what we are trying to do is allowed, but is dated 2011 so legislation may have changed since:

https://www.taxinsider.co.uk/600-How_to ... 90_10.html

Just to be clear, I am expecting a capital return from this - it is not an interest free loan!...


I haven't checked the wording is precisely the same (nor have I studied the article) but the 2011 article refers to HMRC's views contained with the PIM here:

https://www.gov.uk/hmrc-internal-manual ... al/pim1030

Extract only:

But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.

Presumably you'll be seeking professional advice in due course, as the article does mention the need for a Declaration of Trust, unless, of course, you'll go it alone with the help of the legal Fools hereabouts.

When we come to sell, 2 (likely more if we include our wives) lots of annual CGT allowances are available.

That would depend on a number of factors but, depending on the circumstances, the CGT annual exempt amount may not be available to, say, your brother if he is really engaging in a trade of refurbishing and selling shortly thereafter.

His profits might be chargeable to Income Tax (as, possibly, might be yours). This may not be the case here, as you mention buying an investment property and then letting it but I mention it in passing.

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Re: A potential property investment

#75416

Postby PinkDalek » August 18th, 2017, 12:57 pm

StepOne wrote:Yes, but that doesn't change things does it? Couldn't half the sale proceeds just be gifted back? And pay CGT if required.


Perhaps you'd help by saying what doesn't change things.

Your idea seems to be A to loan an amount to B, then B to gift a larger amount back to A at a later stage, presumably also paying off the loan.

What would be B's CGT position? No deduction for the "gift" to A?

What would be A's CGT position? Possibly chargeable to CGT on his share of the gain (effectively doubling up on part of the overall gain)?

Then there may be IHT considerations on the "gift" profit.

It wouldn't be accepted as a "Gift" in any event, as full disclosure of the arrangement would no doubt be made.

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Re: A potential property investment

#75421

Postby PinkDalek » August 18th, 2017, 1:14 pm

hiriskpaul wrote:I have just come across this, which says what we are trying to do is allowed, but is dated 2011 so legislation may have changed since:



I'm too late to edit my first reply but would also mention there are plenty of other articles on the subject.

There is one in "Taxation" (dated 2011) which may also benefit from a read, as it also talks about (business) partnerships or not.

A direct link is here https://www.taxation.co.uk/Articles/201 ... t-division but that might be for subscribers only (I'm not one but can access it).

Available in Google's cache using:

Taxation Rent Division

hiriskpaul
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Re: A potential property investment

#75432

Postby hiriskpaul » August 18th, 2017, 1:32 pm

PinkDalek wrote:
hiriskpaul wrote:I have just come across this, which says what we are trying to do is allowed, but is dated 2011 so legislation may have changed since:

https://www.taxinsider.co.uk/600-How_to ... 90_10.html

Just to be clear, I am expecting a capital return from this - it is not an interest free loan!...


I haven't checked the wording is precisely the same (nor have I studied the article) but the 2011 article refers to HMRC's views contained with the PIM here:

https://www.gov.uk/hmrc-internal-manual ... al/pim1030

Extract only:

But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.

Presumably you'll be seeking professional advice in due course, as the article does mention the need for a Declaration of Trust, unless, of course, you'll go it alone with the help of the legal Fools hereabouts.

When we come to sell, 2 (likely more if we include our wives) lots of annual CGT allowances are available.

That would depend on a number of factors but, depending on the circumstances, the CGT annual exempt amount may not be available to, say, your brother if he is really engaging in a trade of refurbishing and selling shortly thereafter.

His profits might be chargeable to Income Tax (as, possibly, might be yours). This may not be the case here, as you mention buying an investment property and then letting it but I mention it in passing.

The manual does mention a "signed a declaration under ICTA88/S282B or ITA07/S837 stating their beneficial interests in both the property and the income arising from it", but only appears to apply when owners are husband/wife, or civil partners. In that case it looks like the income can only be split along the lines of beneficial ownership.

It looks to me as though an up-front agreement between my brother and I (plus possibly wives), drawn up by the conveyancing solicitor, assigning all expenses and income to my brother would do the trick.

I am aware of the possibility of capital gains being treated as income thanks. The property we would buy would very likely need a lot of up-front investment before it is let, so if we did sell too soon there is the risk that the profits would be considered trading income. However, it should hopefully not apply in our case as we are intending for this to be a 10+ year investment.

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Re: A potential property investment

#75436

Postby hiriskpaul » August 18th, 2017, 1:43 pm

PinkDalek wrote:
hiriskpaul wrote:I have just come across this, which says what we are trying to do is allowed, but is dated 2011 so legislation may have changed since:



I'm too late to edit my first reply but would also mention there are plenty of other articles on the subject.

There is one in "Taxation" (dated 2011) which may also benefit from a read, as it also talks about (business) partnerships or not.

A direct link is here https://www.taxation.co.uk/Articles/201 ... t-division but that might be for subscribers only (I'm not one but can access it).

Available in Google's cache using:

Taxation Rent Division

A very useful Google search thanks. It produced an article from the taxation web site discussing a situation not greatly different to the one we are looking to do, which contained this:

It is not clear whether the sister has transferred her share in the capital of the property to the brother or is just waiving her income entitlement while retaining an interest in the capital value. Income arising from property can generally be expected to be split between the owners in the proportion in which they hold legal title.

However, there is no obligation on the parties involved to split the income in this way. Unless the owners are spouses or civil partners, they are free to agree between themselves the way in which income is to be split. Therefore, the allocation of the whole of the income to the brother is acceptable.
Last edited by hiriskpaul on August 18th, 2017, 1:51 pm, edited 1 time in total.

hiriskpaul
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Re: A potential property investment

#75439

Postby hiriskpaul » August 18th, 2017, 1:47 pm

PinkDalek wrote:
StepOne wrote:Yes, but that doesn't change things does it? Couldn't half the sale proceeds just be gifted back? And pay CGT if required.


Perhaps you'd help by saying what doesn't change things.

Your idea seems to be A to loan an amount to B, then B to gift a larger amount back to A at a later stage, presumably also paying off the loan.

What would be B's CGT position? No deduction for the "gift" to A?

What would be A's CGT position? Possibly chargeable to CGT on his share of the gain (effectively doubling up on part of the overall gain)?

Then there may be IHT considerations on the "gift" profit.

It wouldn't be accepted as a "Gift" in any event, as full disclosure of the arrangement would no doubt be made.

In addition to these difficulties, if I just loaned the money and took a profit on disposal, the HMRC might, quite legitimately in my opinion, consider any profit I might make as deferred interest. That would be very unwelcome.

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Re: A potential property investment

#75440

Postby PinkDalek » August 18th, 2017, 1:56 pm

hiriskpaul wrote:A very useful Google search thanks. It produced an article from the taxation web site discussing a situation not greatly different to the one we are looking to do, which contained this: ...


For future reference (mine and others) that one appears to be :

Taxation Siblings and rent (30 April 2014).

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Re: A potential property investment

#75774

Postby Wizard » August 20th, 2017, 8:46 am

hiriskpaul wrote:
tjh290633 wrote:Is a possible way to set up a company, two shares only, one of which is entitled to dividends and the other not?

Call it a "Capital Share" and an "Income share"? Something like a split IT?

TJH

Yes, we could do any manner of things like this through a ltd company, including making the company an interest free loan to buy part of the property instead of all capital, then drawing a tax free "income" from repayment of the loan. But there are drawbacks to owning property through a company, so I was really exploring other potential options.

I thought that a lot of people were trying to move to holding buy to let property in companies because of the recent (and ongoing) changes to how buy to lets are taxed. I appreciate it may not be a driving factor for you as you are not taking income, but might it be better for the two of you overall?

Terry.

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Re: A potential property investment

#75807

Postby hiriskpaul » August 20th, 2017, 11:52 am

Wizard wrote:
hiriskpaul wrote:
tjh290633 wrote:Is a possible way to set up a company, two shares only, one of which is entitled to dividends and the other not?

Call it a "Capital Share" and an "Income share"? Something like a split IT?

TJH

Yes, we could do any manner of things like this through a ltd company, including making the company an interest free loan to buy part of the property instead of all capital, then drawing a tax free "income" from repayment of the loan. But there are drawbacks to owning property through a company, so I was really exploring other potential options.

I thought that a lot of people were trying to move to holding buy to let property in companies because of the recent (and ongoing) changes to how buy to lets are taxed. I appreciate it may not be a driving factor for you as you are not taking income, but might it be better for the two of you overall?

Terry.

I think there are 2 main reasons to go down the ltd company route. The first is that the entirety of loan interest can be set against profits, which will no longer be the case for normal BTLs from 2020. The second is that corporation tax rates are typically lower than income tax rates and so more money can be kept within the company to fund future property purchases.

In our case, we would most likely be cash purchasers, so the interest issue would not be relevant. We do not envisage buying more than one property this way either. There are sill some advantages to incorporation though, such as more flexibility on timing and type of income. In this scenario it is likely that my brother would take an income through PAYE, below the NIC threshold, and from a repayments of the director's loan if he wanted it. We could also go down the route of different share classes, such as A shares giving entitlement to capital and B shares giving entitlement to capital and dividends. The disadvantage is the increased complexity, admin and cost, although none of this is particularly onerous. We would not need to be VAT registered for example.

When disposing of the property, the company would get indexation relief on the capital gain, so lowering the CT to pay, but we would then pay dividend income and/or capital gains tax on winding up the company. Entrepreneur's Relief would not be available, however the CGT rate on winding up is currently lower than the CGT rate on property.

Now I know the options available I need to run some scenarios. I also need to decide whether now is a sensible time to be investing in UK residential property. Especially so as I feel as though I already have more than enough exposure to it. High property prices, probable Brexit induced recession, strong likelihood of a Corbyn government. It may be better to delay until the property market is on its backside, which of course may not happen for many years. Thoughts on whether this is a sensible time to invest would be gratefully received.

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Re: A potential property investment

#75814

Postby Wizard » August 20th, 2017, 12:17 pm

hiriskpaul wrote:Now I know the options available I need to run some scenarios. I also need to decide whether now is a sensible time to be investing in UK residential property. Especially so as I feel as though I already have more than enough exposure to it. High property prices, probable Brexit induced recession, strong likelihood of a Corbyn government. It may be better to delay until the property market is on its backside, which of course may not happen for many years. Thoughts on whether this is a sensible time to invest would be gratefully received.

I have been mulling this one a bit as well, more in terms of disposal than purchase though. In addition to the risk factors you identify I also think that as the buy to let tax changes come through we may see a lot of small landlords offloading property as they find they are having to pay the tax out of their own pocket as buy to let profits do not cover the tax. This will be made much worse if the tax changes are accompanied by interest rate increases during up landlords' mortgage payments.

Whilst a sell off may reduce prices I do not think it will materially reduce the demand for rented property. Many are renting because they cannot buy. They cannot buy for two reasons they cannot justify the required borrowing level with their income and they do not have a deposit in the tens of thousands of pounds. Even if a fall in house prices may make monthly repayments more affordable (if interest rates do not rise to offset this of course) But it will not fix the deposit issue, if prices fall by 10% that £50k deposit may become a £45k deposit, but that will not change things for many.

So if supply contracts and demand is broadly stable then the remaining landlords will just be able to increase prices thereby helping offset the tax changes. I am awaiting the outcry of the next housing crisis as people can neither afford to buy or afford to rent, but that is another issue.

Of course for you the increased income in this scenario will not compensate for the drop in value of the property. All in all I must admit I would be wary of investing in UK proprperty right now if the only source of return was from capital appreciation.

Terry.


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