Owning properties as a Sole Trader
Holding a property in a sole name can be tax beneficial under certain circumstances. But as with all strategies, there are benefits and drawbacks of owning properties in this way.
Buying properties as a Sole Trader
A Sole Trader is an individual who buys properties in his or her sole name. Although it is still a very common way to purchase properties, it is not necessarily the most tax efficient. But in most cases, properties are usually purchased as a sole trader for non-tax-related reasons.
Here are the two most common non-tax-related reasons why you might decide to buy property as a sole trader:
When is it tax efficient to buy property as a Sole Trader?
- You don’t have a partner who you can invest with.
- You don’t want to invest with anyone (generally because you can’t trust anyone, or you want total control over your investment).
- If you have invested for either of these reasons, you can still make tax savings.
The ideal scenario for buying a property as a Sole Trader is if you have no income. This way you can utilise your annual tax-free Personal Allowance. In simple terms, the further your income is from the higher-rate tax bands, the more you will save in Income Tax by having the property in your sole name. This is especially true if your partner is a higher-rate taxpayer.
The following two case studies illustrate these points:
Case study one - Sole Trader with no income
Joanne is a married woman but does not work. Her husband is a high-flying executive who earns £70,000 per annum.Upon the death of a relative, Joanne is left £100,000. She uses the entirety of this inheritance to purchase an investment property.
She makes £600 rental profit per month. (She bought the property with cash, so therefore she has no outstanding mortgage or other costs in the 2014-15 tax year).
This means that she makes an annual rental profit of £7,200. She is not liable to pay any tax on this amount as it is within the annual personal income tax allowance of £10,000.
Had Joanne bought the property in joint ownership with her husband, then he would have been liable to pay tax at 40% on his share of the investment. If his share of the property was 50%, then he would have an annual tax liability of £1,440.
This means that over a 10-year period, Joanne will see a minimum tax saving of £14,400 by owning the property in her sole name.
Case study two - Property investor with no income, but partner works
Lisa is a married woman and earns £15,000 per annum as a store sales assistant. Her husband is a hotel manager and earns £45,000 per annum.
They decide that they want to start investing in property and purchase a property for £45,000.They take tax advice before investing and are told that they will pay less annual Income Tax if the property is purchased in Lisa’s sole name.This is because she is not a higher-rate taxpayer.
Planning is key to a successful strategy
Planning for a tax situation you are likely to face is much better than trying to get out of a tax problem that you have unknowingly (or
even knowingly) fallen into.
Some simple planning into strategies before you make your investment can help you to avoid large tax bills and develop a profitable and successful investment.
For more tax information look to our recent articles, www.martinco.com/news/category/tax-news-tips.