Iain Wallis

Proven Tax Strategies for High Net Worth Individuals

0191 603 0270

5 April 2012 Approaching fast: only 23 days left for tax free money!

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This is a reminder from a blog posted after the stampede to meet the 31 January deadline.

There’s every good reason to take action and not leave money in the HMRC coffers. Nothing untoward or complicated Barclays strategies, just honest sound tips to save tax and generate free money.

Here’s a few tax tips to ponder and take action upon before the end of the tax year:

Income Tax

Those property investors who do not trade through a limited company have no choice as to when to make up your accounts. Letting income will always be that arising in each tax year to the 5th April.

In looking to save tax in any business approaching a year end, you would look to defer income and maybe bring forward expenditure.

Now with rental income it’s pretty hard to defer income as I would expect you receive your rental each month so not much planning opportunity there then so what about expendtiture. Well now we’re talking.

If you’ve some major repairs on the horizon, maybe a complete repaint and remember we are talking repairs here not capital expenditure, get in place a contract for the work to be undertaken. If you’ve contracted to have the work done then these costs can be brought into your letting accounts which a) may reduce the level of profit and save tax or b) turn a profit into a loss and again save tax.

Remember that loses can only be offset against other property income or carried forward in perpetuity to offset against profits.  As an aside tax losses are personal and so a) can not be transferred to anyone and b) go with you to the grave.

Capital Gains Tax

You may have in your portfolio a property that is sitting on a nice capital gain. Now may be a chance to offload that at a slightly below market price for a quick sale and a tax free gain. Each individual can currently make capital gains tax free of £10,600. So a property held jointly could show a gain in excess of £21,200 and if sold before 5th April 2012 not create a tax liability.  I say in excess because you pay capital taxes on the net sale proceeds less the cost of acquisition.

Inheritance Tax

As with income tax and capital gains tax there is an exemption for inheritance tax. The annual exemption is currently £3,000 and thus the first £3,000 of any transfer of value will be exempt from Inheritance Tax. If the exemption is not used then this can be carried forward. So assuming no gifts were made last year, Mum and Dad could gift £6,000 to their children completely tax free. As an impoverished trainee accountant it was a relief I often brought to my parents attention, though this simple tax planning strategy always fell on deaf ears!

We are talking tax free money here so please take action.

Am I Trading or Investing in Properties?

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Many people who start out in property call themselves investors but are they property investors or property traders?

In my experience they can call themselves what they like but it is the facts of the case and how you carry out your business that will determine whether the taxman (HMRC) sees you as an investor or a trader so beware and to make matters worse there is always a muddying of the waters.

A property investor will hold properties as a long term investment. They will be the assets of the business and bought a) to produce rental income and b) over time capital growth. Don’t believe what you read in the papers, it’s a fact that property has historically doubled every 7-10 years despite some wild fluctuations within that period. Rental income is accounted for on an annual basis to 5 April each year and property disposals dealt with as capital gains and with use of the annual exemption (currently £10,100 per person) a jointly held property could show a healthy profit with no capital gains tax payable.

  • Profits are subject to capital gains tax
  • Use of annual capital gains tax exemption
  • Possible use of principal private residence relief (PPR)
  • Totally exempt for non UK residents
  • No National Insurance on profits
  • Not good for abortive expenditure (surveys, finance applications etc)

A property trader will purchase with a view to making a quick short term gain through a refurb and then flipping the property on. It’s unlikely that the property will ever be let out and the profit is made when the property is sold on for a higher price. Here any profit would be subject to Income Tax and National Insurance or Corporation Tax if held within a limited company.

  • Better scope for claiming abortive expenditure
  • No use of annual exemption
  • Greater relief for interest costs
  • Chose any year end
  • Losses used against other income
  • Profits taxed at marginal rates and attract National Insurance if self employed
  • Profits charged to corporation tax if a limited company.

So given the tax treatment it is clear why people call themselves investors not traders though the key question is whether any profit is a capital gain or a trading profit? It’s not clear cut and naturally keeps HMRC on their toes looking for traders not investors as that will typically bring about more tax revenue. Something they are keen to do at the moment.

It is not your choice but in reality is determined by how the business is run and also on your intentions at the start of a project but how do you prove your intentions to HMRC and what if I change my mind?

  1. Start with making a note as to why you bought a property. Drop a line to your accountant or legal advisor. A business plan would demonstrate what your plans were. That’s a great start and if for some reasons plans change then document them as well. There may be a perfectly good reason why a long term investment was sold short term and documentary proof will help you argue your case with HMRC. Your long term investment in a student flat in Cambridge could swiftly move from long term to short term if little Jimmy fluffs his A levels and ends up somewhere less academic!
  2. Beware of the frequency of transactions. If a property is bought and sold every now and then, that would suggest an investor but if you are buying frequently and selling on that would suggest a trader.
  3. HMRC also get quite excited about the number of transactions in a given period. In theory there is nothing to stop you buying a house, improving it and moving on and making full use of the PPR exemption. Do this every six months and HMRC may get excited and would suggest property trading. After all moving is one of the most stressful things you can do so why would you do it every six months?
  4. How are the transactions financed? Mortgages and long term finance are more indicative of investment, though nowadays some see an ERC as part of development costs!
  5. Letting out a property is indicative of an investment not a trade.
  6. How long a property is held for may also influence HMRC, though again there is no hard and fast rule on this one.

So in summary call yourself what you like “Supreme Allied Property Developer”, “Joint Chief of Staff” but remember what your intentions and actions are will determine whether HMRC see you as a property investor or property trader.

Get that right and you will keep a lot of money out of the taxman’s hands.

Happy investing or is that trading!

Further information on this topic can be obtained from Iain@iainwallis.com

100% Tax deduction for renovation costs

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I thought I’d share a generous tax break called the Flat Conversion Allowance or FCA.

Rather than invest in semi detached or terraced houses, why not think outside the box and look at disused flats above shops or commercial premises?

They will easily be cheaper, can be quickly renovated to add value and they come with a 100% tax break!

To qualify for this generous tax break there are certain key criteria:

  • It must be built before 1980
  • The ground floor must be used for a business
  • The upper floor must have originally been intended as living accommodation
  • Must have been vacant or used solely for storage for a minimum of a year before the conversion starts
  • Any property can have no more than four storeys above the ground floor

The FCA relief allows the purchaser (you or your company) to claim a tax allowance for the cost of capital expenditure. Qualifying expenditure is capital expenditure incurred on, or in connection, with:

  • the conversion of part of a qualifying building to a qualifying flat or
  • the renovation of a flat in a qualifying building to create a qualifying flat, or
  • repairs incidental to the conversion or renovation of a qualifying flat, or
  • the provision of access to a qualifying flat.

Examples of qualifying expenditure are the costs of dividing a single property to create a number of separate flats, and the costs of building dividing walls or installing a new kitchen or bathroom.

Capital repairs to the property incidental to the conversion or renovation may also qualify.

Expenditure incurred in connection with the conversion or renovation of a flat may include costs outside the direct boundary of the new or renovated flat such as the creation of stairwells within the building or provision of extension, solely to provide access to the new flats. It may also include architect’s and surveyor’s fees.

Examples of associated costs that may qualify are:

  • inserting or removing walls, windows, or doors,
  • installing and upgrading plumbing, gas, electricity or central heating,
  • re-roofing incidental to the conversion/renovation,
  • providing access to the flat(s) separate from the commercial premises, including extensions to the building to contain this access, if required,
  • providing external fire escapes where regulations require.

Some expenditure does not qualify for flat conversion allowance (FCA).
Expenditure does not qualify if it is incurred on or in connection with:

  • the acquisition of land or rights in or over land,
  • an extension to the building (unless it is required to give access to a qualifying flat),
  • the development of land adjoining or adjacent to the building. This includes conversions forming part of a larger scheme of development, and
  • the provision of furnishings or other chattels.

Normally a deduction for this kind of capital expenditure would only be given when you sold the property as a deduction for capital gains tax. Here though, a 50% taxpayer would immediately recover half their renovation costs from HMRC.

It gets better! Should this claim create a loss, it can be used to offset against other income, say a salary, The loss does not have to be carried forward to offset against future profits.

So next time you are out looking for BTL property, keep your eye out for some commercial stuff

To Your Property Success!

Iain

 

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