Property & Tax
Five points Property Investors should take onboard when it comes to property and tax.
1
Consider the type of property and time frame of the investment, short term or long term. Property will either be commercial and/or residential property. Commercial properties include offices, hotels and warehouses.
Regarding rental income, residential rent may be more certain on an ongoing and long term basis, compared to commercial property. Commercial property tenants are normally responsible for their own costs and expenses. That’s not normally the same when it comes to residential property.
There are also different tax breaks that apply. For example, stamp duty land tax is set at a different rate for residential properties, compared to commercial properties.
2
Decide whether you’re going for capital growth or as an income. It may be that you are looking at the long term and seeing property as part of your future pension pot.
Capital, taxes are applied slightly different to income-based taxes. For example, for individuals capital taxes range can be as low 10%. This can go up to 28%; taxes on income can be as low as 20%, and as high as 45%.
3
Who has legal ownership of those properties? The change in mortgage interest rules prompted more people to owning property through a company. The tax year 2017-18 was the first year where restrictions came into force. These rules on restricted interest claims do not apply to companies.
However, caution must be exercised with running a property business through a company. The consideration and challenge is that the company owns the asset, and how to best extract those funds for personal use, dividends, salary, pensions or benefits.
4
Ownership determines the types of tax. If owned individually then income tax applies to the profits, CGT allowances are allowed for disposals. If property is owned through a company then the current tax of 19% will apply on profits and gains. However when extracting the funds tax will be applicable on that personal income. Rates can be as low as 7.5% to as high as 45% depending on how it’s taken out (dividends v salary) and your tax payer status.
One overlooked tax which applies to all property development is VAT. If you’re converting a property then you can apply for VAT to be at the lower rate of 5%, the standard rate being 20%. That is a significant cost saving in terms if you’re planning to do any conversion and renovation of buildings.
5
A final consideration and tip is that whatever you do, record keeping is critical. Keeping a record of what you’re spending, not just in terms of amounts and dates but what the spending’s going on is going to important for working out potential tax liabilities and substantiating claims.
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