By Louise Misiewicz
Are you keeping your fair share of earned property income?
How are you protecting your wealth for the future?
I’ve been speaking to property investor clients over the last few weeks about wealth management and tax planning – two key areas to consider when building and then protecting a profitable property portfolio.
Some of the questions I ask my buy-to-let landlord clients include:
- Are you keeping your fair share of earned income or is HMRC taking more than what seems reasonable?
- Are you protecting your hard earned wealth for future generations, or are your assets under threat from HMRC’s Inheritance Tax or family mis-use?
- Are you getting the best returns from your investments and assets, or are your investment managers getting a better deal?
- Do you know how your pensions are performing, and are you pleased with it or could it be better?
My property investment clients spend substantial amounts of their time working, either as an employee or in their property businesses, and I believe that the blood, sweat and tears put into their property portfolios deserves a reward that’s tax-efficient today and in the future.
How can you effectively manage your wealth planning?
My clients typically come up against similar issues in their property portfolios based on the key areas of wealth management and tax planning.
Once they have taken money from their property business, they invest some of that money into savings for a rainy day.
The problem is that many buy-to-let landlords invest without monitoring the ongoing performance once invested.
This doesn’t stack up – after all, you wouldn’t decide to work hard on your property business Monday to Thursday, only to ignore your customers on a Friday.
Sadly, some property investors take this approach when it comes to their investments.
As such, their investments over time yield very poor returns for them, and yet – more to the point – their investment managers and HMRC take big cuts.
To add to the delights of others taking their cut, I know that family matters can also create huge changes in wealth for my property investor clients.
I know, for example, of husbands and wives separating: with children involved and this phase of a relationship can be an enormous emotional rollercoaster, which sometimes leads people to make decisions that they would not ordinarily do regarding their wealth management and tax planning matters.
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Another area that my property investor clients need to consider is death. Death is not a subject that many of us like to talk about. However it is necessary to ensure that loved ones receive wealth after the inevitable.
There are many examples I’ve been told where buy-to-let landlords build wealth with a clear expectation of how they want this passed through generations of family, but due to lack of wealth management, the wrong people receive the money and assets.
And if a property investor hasn’t drawn up a Will before their death, the Crown receives ALL of the assets.
It’s also worth remembering that when you die, you could be leaving loved ones to deal with the fact that the estate is subject to HMRC’s 40% Inheritance Tax. Wealth management and tax planning are so vital.
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What measures can be taken to protect your portfolio?
I work with property investor clients to get them in a position where:
- They keep more of what they earn and shield their wealth from HMRC’s income tax today and going forwards
- Their investments are stored in a tax-efficient vehicle and provide them with returns that build wealth
- They structure family assets to legally and safely avoid inheritance tax applying to their estates
- They build in systems and legal documents to ensure that they manage where their wealth goes, when and how, and with no one after their death able to manipulate this
Below is a typical example – with client names and specific details changed for privacy purposes:
Sandra is a wealthy lady that was widowed by her first husband a number of years ago. She is now involved in another relationship, and is due to be married within the next few months. She is a high rate tax payer as an employed medical consultant, and has two grown up sons aged 20 and 23 respectively.
Her soon-to-be husband John has a business from which he takes each year wages and dividends that means he remains a basic rate tax payer. He also has three adult children of his own.
Sandra has property income in her sole name as well as her salary, and wants to ensure that her two children are protected from any issues that she may face in the future with her new partner.
There are a number of major tax issues here, including:
- Recent tax legislation changes mean that her portfolio will be taxed at 65% because of the mortgage interest relief cap by 2020/21.
- If she separates from John in the future then her wealth and assets will most likely be divided between her two children and his three children.
- As her net assets are over £1m, when she dies there will be an inheritance tax bill of 40% on her estate over and above the first £325,000 (before she gets married). On calculation of the detail, there is a likely Inheritance Tax liability of £270,000.
The wealth management and tax planning solutions I devised included:
1) Put in place legal documents to amend ownership of the property income post-wedding, so that John gets the majority of the property income (as he has agreed to manage the properties). This means he will be taxed at the basic rate of income tax which is 20% – this saves a lot of tax. In this case, the tax liability would be reduced by 2021 by at least £6,500 per annum.
2) Have Wills that specified which children got which assets in the event of death. Sandra’s home would be put into trust so that her partner would take possession of the house to live in, but on his death would be passed to her two son’s only. She made specific provisions to ensure that her two children had to be married with decent jobs before they took control over the assets. Albeit they were mature, she knew that they could still make rash financial decisions that could erode their wealth unnecessarily and needed more life experience before being able to make decisions about what to do with her home.
3) Restructure her pensions from being paid to her spouse (50% to spouse and 50% lost on her death) to her sons and that they would benefit from 100% of her pension in the event of her death.
4) Invest more of her salary into her pension (now sharing living expenses with John meant that she did not need all of her earned money to live comfortably) which also benefited from tax relief.
5) Commence handing over some of her income producing investments to her two sons in a tax efficient way to make best use each year of her capital gains tax allowances. The added advantage of this was that slowly over time it was reducing the size of her estate and therefore helping to minimise any inheritance tax that would be payable at her death.
6) Gift one of her buy-to-let properties to her sons without the payment of Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT) yet benefitting from the future mitigation of inheritance tax. This also allowed her sons to get onto the property ladder themselves, and become even more independent.
The above work saved at least £6,500 income tax per year and over £150,000 from the future inheritance tax bill. This also provided a peace of mind that there was a structure in place that was agreed by both Sandra and John.
I have written a number of useful articles for property investors around wealth management and tax planning, including:
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