Lock-In: Hybrid Business Models for Portfolio Landlords

All Webinars Lock-In: Series 2

Series 2, Episode 6

Hosted: 07/10/2020 12:00:00 am

Two things are certain in life, death and taxes.

Luckily our main focus was on the latter of these on our latest webinar with Less Tax 4 Landlords (even if death planning did come up a few times), and we wanted to know how to avoid paying over the odds.

You can view the webinar in full above, but if you’ve only got a few minutes, keep on reading for some of the key talking points. So let’s get into it a little differently this week by finding out the What, Why, When, Who, and How of LT4L’s hybrid business model.

The What

An obvious question to start with: with our wordiest webinar title to date, we wanted to know what on earth is a hybrid business model?

Various structures were discussed on the night, including the benefits and drawbacks of Ltd and own-name setups, with a main focus on the hybrid business model as a possible alternative option – and in essence the hybrid business model (HBM) is this:

An HBM is an LLP (or Limited Liability Partnership) made up of both human and corporate partners – also known as a mixed partnership. To go one step further, the shareholders of this corporate partner within the LLP can be the same human partners that make up the LLP.

It sounds like inception-level stuff but fear not, the flowchart below (shown in this week’s webinar) provides a great explanation:

Hybrid Business Model structure

Now depending on your business requirements, an HBM could deliver:

  • Full relief for finance & mortgage costs (Section 24 Tax Changes)
  • Reduced Capital Gains Tax (CGT) on Portfolio Reinvestment
  • Inheritance Tax typically mitigated within 2 years of trading
  • Maximum Tax Rate of 20% payable on your property income

And all with no need to re-mortgage or change the legal title on your properties.

The Why

Way back in 2015, then-Chancellor George Osborne announced Section 24. We won’t go into what this is at the minute, as most landlords will be more than aware of the changes, but if you’re not – Less Tax 4 Landlords break it down very nicely on their website.

Before this point, using your own name or a limited company for your property portfolio was an effective enough strategy, but as we continue to see the impact of section 24 come into effect and the likely maximum tax rate of these models hitting up to 60% – a new strategy is necessary.

The why of this webinar quickly becomes apparent – if you’re looking to grow your property business and protect it for future generations, the old systems of using your personal name or using a LTD company no longer cut the mustard.

The When

As you can imagine, the effects of this legislation is already being felt across the market, as costs continue to rise and margins continue to shrink – or in some cases, disappear entirely. Malcolm explained what is known as the tax escalator effect in the webinar, and things were looking pretty scary from 2019 onwards, but particularly during 2021 and 2022.

So to answer the question, when is the best time to look into tax-efficient alternatives? Well, five years ago, but since that’s impossible, we’ll have to settle for today.

Section 24 Impact

 

The Who

We issued a health warning at the start of the webinar, that this is not a one-size-fits-all policy, and, importantly, this is not simply a model to be used to avoid paying your fair share of tax.

The hybrid business model is for:

  • New or growing business owners looking for financial independence.
  • Full time landlords looking to plan their retirement
  • Portfolio landlords (usually landlords with 4 or more properties) at capacity and needing to make changes to allow their business to grow.
  • Family businesses looking to make sure the business can remain intact on succession.

It is not for non-business-focused landlords just looking cut their tax costs, otherwise everyone would be doing it!

The How

It should go without saying, we do not advise trying to set a model like this up on your own due to the complications and heavy legal ramifications that can surface if something goes wrong. If you think this is something that could work for you, Less Tax for Landlords offer a free initial assessment to find out if you’re in the market to benefit from their services.

You can also check out their Video Vault here for a host of tax-related content and information.

And that’s your lot! You can learn more about Less Tax for Landlords here. 

 

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