11 May 2017 4:25 PM

With the buy to let (BTL) market suffering from repeated attacks by the Treasury investors are looking for advice how to structure their portfolios in a more tax efficient manner. For many moving to a Limited Company ownership is helpful, securing 19% corporation tax on net rental incomes, importantly after full deduction for all revenue costs including mortgage interest. This is in contrast to the personal holding of investment property which becomes more expensive over the next four years as the higher rate tax relief on personal mortgages for BTLs is gradually removed.

Of course banks and others lenders take their pound of flesh by demanding higher rates of interest for corporate lending, and there may be higher administration costs with the need to file accounts at Companies House.

As an alternative structure I have found the use of Trusts can be more beneficial in the right circumstances.

If grandparents can be persuaded to put some funds into a Trust for the benefit of their grandchildren this seed capital can be used to purchase part ownership of a family BTL. The remainder of the BTL is best owned by a Limited Company as explained above. The company has the borrowing and all the interest costs. The trust has a gross share of rental income with little expenses.

Now the Trust pays 45% income tax on its share of rental income. Ouch you say!

BUT the trust then pays out its net after tax to pay for little Jonny’s school fees. This is an income distribution by a grandparents’ trust so the school fees payment is treated as taxable income to Jonny.

Now Jonny has a personal income tax allowance of £11,500 so he pays no tax on that income.

If the school fees are £6,000 the Trust will have paid £4,909 in tax and Jonny’s gross taxable income is £6,000 + £4,909 = £10,909.

All covered by his personal allowance so Jonny, with the help of his parents, claims back the tax of £4,909 which goes into his personal bank account to pay next term’s fees!

A word of warning Trusts are complicated animals with Inheritance Tax charges leaping out every ten years to catch you, so please take professional advice first.