how to be a property investor part 2

Posted on April 7, 2011 by editor
Posted in Buy To Let Property, Mentor Moments, Money & Tax, Property Development Tagged be, how, investor, property, tax, tips, to

Last time I posed a few questions to get you thinking about the many and varied ways that you can be involved in property as an investor. The term ‘investor’ is often misused in property circles.

Largely this is down to what I like to call ‘celebrity landlords’; ie those larger landlords that spend time speaking at various networking events trying to tie folk into courses on ‘how to be a property investor’ etc. Newcomers to property also tend to use the term as a catch all phrase. This is a very bad habit to get into.

If you really want to be taken seriously and remain within the law, then you must get the distinction between being an investor ( long term buy and hold strategy, and trader-short term buy to sell) right.

Below I have posted two charts which show you the different ways the HMRC will tax you given the two different scenarios, this I believe, will show you clearly what you are taking on from a tax point of view at least. And, as we all know, if you don’t get the right tax advice, you can loose thousands of pounds to the government just because they view your actions differently to what you may have intended.

However, the one thing the government does not always recognise, is that a property deal can change if the circumstances around it in the market place change. To them it’s black and white. You may take on a property deal expecting to sell, but the market or your own circumstances could change forcing you to rent it out, for example.

Next time I’ll show you some useful tips to help you stay within the law and be taxed correctly.

TheTax Advantages

Trader		Investor
1) More indirect expenses are claimable		1) All profits are treated as CGT. Max long term tax rate 24% (if held for 10 years)
2) Annual Exemption limit ( per person and changes with each budget)		2) Long term assets get a higher rate of taper relief
3) Taper Relief		3) Losses offset against other income in the same or previous tax year.
4) Principal Private Residence Relief		4) Set any date for the accounting year to end
5) Private Letting Relief		5) Value of development or management business exempt from IHT residents
6) Total tax exemption for non- U K residents		6) Business can be transferred without tax charges.
7) No National Insurance contributions

The Disadvantages

Trader		Investor
1) All business assets are liable for inheritance tax.		1) Profits on sales are subject to income tax and NI contributions.
2) Abortive expenditure on property purchases (ie: surveys) are not allowed for tax purposes		2) No UK residents are fully taxable on all profits of Uk property.
3) Very limited scope for loss relief.		3) VAT registration will be compulsory if turnover exceeds £61,000
4) Accounting periods end on 5th April each year.
5) Difficult to transfer business without incurring tax.

In the next blog of this series, I am going to give you some simple tax tips to help you stay focussed when considering new deals.

(Please note that some of the details here are likely to change with each budget that is updated via the treasury-and any given are for illustrative purposes.)

As I said previously, get yourself a good tax adviser who invests in property themselves, as they are the ones who will know the maximum allowances you can claim for and hence give you greater profit margins long term. A good tax adviser can be one of your best assets-literally!