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UK Property Investment news and comments from Mark Harrison of YourPropertyExpert.com

Archive for the ‘Property Tax’ Category

Bye Bye Stamp Duty? Oh, wait a moment…

Posted by markharrison on August 5, 2008

Well, the front page of “The London Paper” this evening ought to win a prize for something, if not actually good journalism.

The headline read: “BROWN POSTED TO SCRAP STAMP DUTY”, and the article pretty much gave no more detail, except it managed to use fewer CAPITAL LETTERS.

The BBC, as ever, was somewhat more balanced. They reported things somewhat differently:

  • Gordon Brown is actually still on holiday, so it’s Alastair Darling, the current Chancellor, who made the, well non-announcement.
  • The announcement was actually that nothing had been ruled out. It seems more likely that there will be a temporary delay in collecting SDLT (Stamp Duty – Land Tax), giving people more time to pay, rather than a suspension of it.

The tax is, by the way, one of my pet bugbears – it’s what’s called a “slab tax” rather than a progressive tax.

In a progressive tax, like income tax, you have multiple rates, and you pay each rate on a proportion of your earnings. So, on the tax return I’m just going through (2007-2008):

  • I pay nothing on the first £5,225
  • I pay 10% on the next £2,230
  • I pay 22% on the next £32,369
  • I pay 40% on the rest [OK, it’s more complex, because some of my income is capital gains rather than “income”, but the principle stands.]

By comparison, SDLT is paid on the sale price of the property, and applies to the full amount. There are some exemptions for “disadvantaged areas”, but in most of the UK, residential property goes:

  • £0 – £125,000 – 0%
  • Over £125,000 – £250,000 – 1%
  • Over £250,000 – £500,000 – 3%
  • Over £500,000 – 4%

The downside of this is that there is a tremendous incentive to make properties appear just UNDER the threshold, because the full tax applies to the whole lot.

  • A property sold for £250,000.00 pays 1% – £2,500 in SDLT
  • A property sold for £250,000.01 pays 3% – £7,500 in SDLT

Now, even in this property “crash”, £250,000 buys a semi-detatched 3-bedroom house, not a mansion, and detatched 3-beds are still (just) going for over the limit. That’s a lot of tax differential for not wanting to share a wall. While I live in a relatively expensive county (West Sussex), I live in a relatively cheap town in the county (Crawley), albeit at the “big end” of Crawley (Maidenbower.) Further into London, prices get much higher.

So, Alastair, how about making SDLT fairer – make it apply like income tax – that buyers pay 1% on the bit of sale price between £125,000 and £250,000 and 3% on only the bit above (up to £500,000)… not the whole lot?

Posted in Property Investment, Property Tax | Tagged: , , , | 3 Comments »

Capital Gains Tax changes – good for property investors, bad for business owners

Posted by markharrison on October 17, 2007

Well, the dust has (almost) settled, and it’s time for a quick review of what Chancellor Darling’s pre-budget report actually means for us.

I should stress at the outset that if you hold business or property assets, and are thinking about selling them, then you should go out and get professional advice from a tax advisor about whether to try to do so before or after the 6th April next year. This is very much my personal understanding of the “headline issues” only… in no way am I trying to give tax advice.

The overall summary is that it’s a welcome piece of news for us property investors, but bad for us business owners (so once again, I’m in a “he giveth with one hand, he taketh with the other) situation.

OK, time to review the current arrangements for Capital Gains Tax (CGT):

1: Everyone gets a tax-free allowance each year for “capital gains” (businesses, property, shares, etc.). In the analysis that follows, I’m pretty much going to ignore this, because it makes the explanation easier, and doesn’t really change the “impact” 🙂

2: Some things (like the house you live in) is exempt from CGT.

3: The “basic rate” for capital gains has been 40%, but with a wrinkle, as follows:

3.1: For “business assets”, like shares in a private (unquoted) company, shares in companies quoted on AIM, shares where you own 5% or more of a given company, or where you’re a Director or Employee of the company, you get “business taper relief”, which has been good. Basically, provided you hold onto the asset for one year, you effectively pay tax at 20% instead of 40% (so-called 50% taper relief)… and if you hold onto the asset for two years or more, you effectively pay tax at 10% (so-called 75% taper relief.) For those of us who’ve built businesses, and then sold them, this has been, well good… since it means that we’ve paid 10% tax on our gains.

3.2: For “non-business assets”, like rental property, you get “non-business taper relief”. This cuts in MUCH more slowly, with not a penny reduction until you’d held the asset for 2 years (at which point you get a reduction from 40% tax down to 38% – woo)… and “full relief” only after you’ve held it for 10 years (at which point you get a reduction from 40% tax down to 24%.)

Some quick illustrations when explain why we property investors have been campaigning to be treated like business owners (given we’re regulated like them!)

  • Hold a business for 2 years, pay tax at 10% when you sell it.
  • Hold a rental property for 2 years, pay tax at 38% when you sell it.
  • Hold a business for 10 years, pay tax at 10% when you sell it.
  • Hold a rental property for 10 years, pay tax 24% when you sell it.

Here’s the proposed new rule…

  • Capital gains tax will be at 18%, irrespective of how long you’ve owned the thing, and irrespective of whether the thing is a “business” or a “non-business” asset.

You can probably see, therefore, why someone who’s got a few buy to lets, and was thinking of cashing out, is probably going to hang on until next April to sell, all of a sudden… and pay tax at 18% rather than between 24-40%.

Likewise, however, pity the poor businessman who has worked the last 7 years, ploughing his life savings into the thing, working all hours, and looking forward to selling out when he hits 60 in 2010… suddenly, he’ll pay 18% tax rather than 10%… almost double what he would have paid.

Expect to see a few small businesses up for sale over the next few months, as people try to sell up under the current rules rather than the proposed new ones…

… but if that’s you looking to sell, go and see a real accountant first, eh?

Posted in Economics, Property Investment, Property Tax | 8 Comments »

Top Ten Tax Deductions for Property Investors

Posted by markharrison on June 21, 2007

For some reason, I’ve been asked quite a few questions about property tax in the last few days. I dug out an article that originally appeared in March 2006 issue of the YourPropertyExpert.com newsletter.

===================================

… I asked my friend Nick Braun, who runs the Tax Cafe, to come up with a Top Ten of Tax Tips for property investors.

Here is his answer:

1.Interest

Whether your interest is tax deductible or not depends on the use to which your money is put. Contrary to popular belief, it does not matter on which property the loan is secured.

If Robert borrows £25,000 by re-mortgaging his home and uses the money as a deposit on a buy-to-let flat he can claim the interest because it is being used for business purposes.

And here’s an interesting tax tip. If you intend to put your former home into your property letting business, consider re-mortgaging it before you do. All the interest will probably be tax deductible.

For example, let’s say Robert’s brother Vincent has a property worth £500,000 and an outstanding mortgage of £200,000. He remortgages the property and raises £250,000 which he uses to buy a new home.

He now starts to rent out his £500,000 property. The entire interest payable on the whole of Vincent’s £450,000 mortgage will be allowable as a tax deduction.

2.Repairs & Maintenance

I could write pages about this so here’s a quickie: Did you know that you can make provision for certain future costs, that you have not yet actually incurred, and still claim a tax deduction? The key requirement is that you are legally obliged to incur the expenditure.

Let’s say Kylie owns three flats in Hutchence Towers. In February 2006 she receives a statutory notice telling her and other owners to carry out roof repairs. On 4th April 2006 a quotation from a local builder is approved and Kylie’s share of the cost is £3,000.

Kylie can make a provision for her £3,000 share of the cost in her accounts for the year ended 5th April 2006, even though the work has not even started yet.

3.Motor Expenses

The cost of running one or more cars used in your property business can be claimed as a business expense. Generally, the vehicle will have some private non-business use, so an appropriate proportion should be claimed.

The appropriate proportion will vary from investor to investor but could be in the range 25% to 50%.

4.Office Costs

Most investors do their admin at home and can therefore claim a proportion of their household bills. Generally the proportion used is based on the number of rooms, excluding bathrooms and kitchens.

Let’s say Gerald runs his property business from a small room in his house. The house also contains a living room, a kitchen, a bathroom and two bedrooms. Gerald’s house therefore has four rooms which count for this calculation.

He can therefore claim one quarter of his bills as a business expense. Expenses which can be claimed include gas and electricity, council tax, repairs to the property and insurance.

5.Travel & Subsistence

Travel costs incurred visiting your existing properties or scouting for new ones should be claimable. If your trip requires an overnight stay you will also be able to claim hotel costs and meals in restaurants.

However, these costs will only be allowable if your trip is purely for business purposes. If you travel to Brighton to view some properties, the fact that you spend a spare hour sunbathing does not alter the fact that this was a business trip.

If you take the whole family to Brighton for a week and spend just one afternoon viewing properties, the whole trip will be private and not allowable for tax purposes.

6.Training & Research

Many investors spend a lot of money on seminars, courses, books and magazines. The rule is that expenses incurred in updating or expanding existing areas of knowledge may be claimed but any costs relating to entirely new areas of knowledge are a personal capital expense.

This can be a difficult distinction to draw, however in most cases property research expenses should be tax deductible.

7.Furnished Lettings

Most landlords rent out their properties fully furnished. You can claim either the “wear and tear allowance” or “renewal and replacement expenditure”. There isn’t enough space here to go into details, however most people are better off with the wear and tear allowance. This generally allows you to claim 10% of your rents as a tax deduction.

8.Legal & Professional Fees

Fees incurred buying a property cannot be claimed against your income tax – they are generally only allowed as a capital gains tax deduction when you eventually sell your property. Costs incurred year in, year out in earning rental profits can be claimed, for example the cost of preparing leases, collecting debts and preparing your tax return.

9. Pre-Trading Expenditure

You may incur some expenses before you even start to rent out any properties. Those incurred within seven years before the commencement of your business may still be allowable if they would normally be tax deductible. In such cases, the expenses may be claimed as if they were incurred on the first day of the business.

10. Rental Losses

All your UK property lettings are treated as a single UK property business. Hence, the loss on any one property is automatically set off against profits on others. Any overall loss cannot generally be set off against your other income but will be carried forward and set off against future rental profits. Losses arising on furnished holiday lettings may, however, be set off against other income and can sometimes lead to useful tax repayments.

Posted in Property Investment, Property Tax | 5 Comments »

Property Tax Calculation Guide – fantastic product

Posted by markharrison on October 27, 2006

Well, it’s that time of year again when I do my tax return.

Actually, it’s worth noting that there is some confusion around, concerning when the deadline is. For the UK tax year that ended in April 2006.

  • We have to put in our tax returns by 31st January 2007
  • If we put in our tax returns by 30th September 2006, then HMRC guarantee to work calculate our tax liability in time for the payment dealine
  • The payment deadline is 31st January 2007

If, as we did last year, we miss the 30th September deadline, then the HMRC will still calculate our liability (basically, as an when they get round to it.) Last year, we were in about the end of October, and the calculation came through early December – in plenty of time.

The risk of missing the deadline is that, if we mis-calculate, we might end up either over-paying (and having poorer cashflow until the refund comes through) or under-paying (and have to pay back the missing amount plus interest.)

Anyway, back to the plot. Late in 2005, I sold a flat I’d bought in 1994, and in which I’d lived for a while (then I got engaged, and Mary and I bought a house together, and started letting out my flat.)

Calculating the CGT payable was going to be a nightmare, because I needed to take into account:

– Indexation relief

– Taper relief

– PPR relief

– Private letting relief

Bit of a nightmare trying to work it out myself, then I bumped into Nick Braun from the TaxCafe at the Property Investor Show, and looked at the Property Capital Gains Tax Calculator they sell, written by Carl Bayley.

I have a lot of time for Carl – the man is a good accountant, a good public speaker, and a good writer, and I’ve been recommending his book How To Avoid Property Tax for a while.

Property Capital Gains Tax Calculator isn’t a book – it’s an addon that works with Microsoft Excel. It basically does exactly what it says on the tin and calculates the tax I owe, but makes sure I pay no more than I need to.

If you have to sell a property, then £30 spent on this will save a lot of time effort, and worry about whether you’d got it right.

Posted in Property Software, Property Tax | 1 Comment »