Where are you on your property journey?
First Published: January 2014 | Available in: Property Articles Your Property NetworkProperty investors walk a well-trodden path, and face common challenges and decision points along the way. It’s sometimes worth taking some time to consider the journey ahead, and where you are along it so far.
Specialist property accountant Stephen Fay ACA looks at the various stages along the property journey, and in particular the finance and tax-related decisions and key points that lie ahead.
Learning the business & gathering investment funds
Taking some time to understand what property investment is about, before ‘taking the plunge’ is always sensible in any new venture. Books, courses, seminars, networking events etc are ‘pre-commencement expenses’ (going back up to 7 years) which are generally income tax deductible.
Borrowing investment capital via a draw-down on the family home makes for cheap finance and is full tax deductible – as are borrowings via personal loans or credit cards.
Interest on borrowings can be offset against rental profits up to 100% of the purchase price of the property – NOT just the (typical) 75% LTV mortgage finance.
Taking the plunge – your first property
Take care to keep a good file of all capital costs, as it is often not until 20+ years later that a property is sold – these include legal fees, finders fees, and any costs involved in the purchase of a property
For those investors that incur marketing costs – such as via leafleting – to buy property direct from vendors, these costs are acquisition costs, and so tax relief is obtained on eventual sale.
Investors who refurb their properties before initial letting can usually deduct such costs from rental profits, provided that the property was in a lettable condition already.
Using a company to buy property
For most landlords, owning property in your personal name is the best tax strategy (and also ensures that finance at maximum Loan To Value can be obtained) as most Capital Gains Tax reliefs are available only to individuals, rather than companies.
A property company can be tax-efficient for investors who already pay Higher Rate income tax, and expect to make significant rental profits. This enables corporation tax at 20% to be paid, rather than Higher Rate income tax at 40-45%. Profits can be used to buy further investment property, pay down debt, or be extracted tax-free at a later date when the investor becomes a Basic Rate taxpayer (e.g. when leaving employment to pursue property full-time).
Companies are often used by investors looking to the very long-term, and who don’t need to draw on the rental profits for personal spending.
How many properties is enough
Property can be addictive – but successful investors grow steadily, rather than growing by explosion.
Maintaining good cashflow, ensure your properties are well-maintained, and having a good chunk of working capital to survive during tough times, are all required to stay safe in the property game. Keep an eye on the down-side at all times – the winds of fortune can change quickly!
Look good to lenders & minimise your tax exposure
Investors often make rental losses in the early years of investing – but these valuable losses can then be used in later profitable years.
Having annual accounts prepared by a specialist property accountant should ensure that every expense, claim, relief and allowance possible. Then, a review of detailed tax-planning options should be completed, considering the investor’s wider financial circumstances. This is needed every year, as the financial performance of the property rental business changes, and new tax changes come into play, as well as changes to the investor’s personal circumstances.
Tax-planning options might include changing the ownership structure (e.g. gifting a larger share of a property to a spouse), or even setting up a property company.
Passing on your property wealth
Many investors wind down their portfolio, by selling off properties and repaying outstanding mortgages. This process can require several years of planning to slowly, and tax-efficiently, unwind the portfolio.
But, be careful to maintain a healthy retirement income, when considering passing on assets to family. This ‘winding-down and passing on’ stage needs to be managed carefully, to make best use of capital gains tax options, exemptions and reliefs.
Estate-planning needs to be planned carefully – it is not for nothing that inheritance tax is sometimes called ‘the voluntary tax’! Professional advice is needed to consider tax-planning options suitable for your circumstances (for example making use of the transferable nil rate band, using a discretionary trust, & making Potentially Exempt Transfers).
Enjoy the journey AND the destination
Property investing is a potentially lucrative business – first and foremost – but also allows for a more enjoyable career for many people. Investors can build an income stream, choose the level of day-to-day involvement they wish to take, choose how large they wish to grow and have a great deal of control over their destiny. Having a good idea about the future, and the decisions that lie ahead, helps investors to plan their affairs, and so not make costly mistakes as they progress along their property journey.