Discussing property taxes would not be complete without including the topic of common mistakes that property investors make when it comes to taxes.
If you’re on top of these, then you’ll be well on the way to ensuring you don’t fall foul of the taxman and also keeping your tax liability to a minimum.
1.    No planning at all
It continually surprises me how many people complain about the taxes they pay and yet then invest without any strategy to minimise taxes. There are taxes that are simply unavoidable, of course, but the informed investor is a better investor.
Improve your tax planning on all your investments by committing to learn about the taxes you have to pay and the allowances and deductions that apply to you. Treat your property investment as a business, and understand your tax position. It may very well be the domain of your accountant to ensure that your tax liability is as low as possible, but never shirk the responsibility that is yours – after all, it is your money.
2.    Paying higher rate tax when there is no need
If you’re a higher rate tax payer, then you really should make sure that ownership of your properties is in the most tax advantageous name. If your spouse is a lower rate taxpayer and it makes sense to transfer properties into his or her name, then do so!
Work through the numbers, make sure that any transfer wouldn’t push your spouse into a higher rate tax bracket, and then assess the cost of transfer. You’ll need to consider future rentals and expenses, and think about investment plans before making your decision.
3.    Forgetting tax deadlines
Keep on top of tax regulations and never forget a deadline. You’ll have self-assessments to submit, and capital gains and income will need to be taken in the right year to ensure you maximise your tax allowances.
4.    Poor record keeping
I’ve lost count of the number of times I’ve seen property investors with money moving in and out of their account and no paperwork to account for the debits and credits. A simple online accounting system, or a spreadsheet and paper filing system, is a cost effective way of organising your property investment finances.
Keep a record of all payments made in connection with your property investment, and keep every piece of paperwork. Spend a few minutes each week on this mundane task, and, with a good accountant to help and collate it all, you’ll be surprised how much tax you’ll save.
5.    Not having an exit strategy
Whenever you invest in property, always have an exit strategy. This has saved my bacon on several occasions, but on plenty more I’ve never had to use it. If you do want to sell a property from your portfolio, make sure that you plan the sale.
For example, if you have a property that is yielding a low income you may want to sell it and release equity for reinvestment elsewhere. If you plan that sale properly, you’ll be able to use your maximum capital gains tax allowance and minimise your CGT liability. This is an area which should be discussed fully with your accountant – and don’t forget to go into the meeting armed with a working knowledge of the tax rules that apply to you. You’ll be surprised how many times a simple question can trigger a tax saving idea.
6.    Using a company structure when it’s not necessary
There are times when putting a property investment portfolio into a company structure (or a trust) makes perfect sense, but often an investor does so when it’s completely unnecessary and doesn’t produce the benefits expected. When this happens, the red-tape and paperwork increases, there are extra accountancy costs, and missing HMRC deadlines can rack up expensive fines and penalties.
If you’re thinking of putting everything under the umbrella of a company or trust structure, take advice first. Be sure that the tax, ownership, and profit advantages that you anticipate will actually pan out.
7.    Being too concerned about tax
While you don’t want to pay tax that you don’t need to, it’s more important to put most of your effort into developing your portfolio to produce income and profit. If you have the wrong strategy and invest in poor properties in poor locations, then you’ll risk making a loss before you begin. With the right strategy, your property portfolio will be well positioned to navigate poor market conditions and come out stronger on the other side.
If your property investment is making profit and you find yourself paying some tax… well, most people would be pleased in such circumstances.
Concentrate on strategy first and foremost, and remember that tax considerations are secondary to making exceptional investments.
8.    Focus on making money
This book is about tax but I am still a big believer that you shouldn’t be side lined into focussing on the tax element without first considering the profit element. Tax is one element, an important element yes but focussing on tax before you work out how this property will make money is folly. I have written whole books on how to spot fundamentals, read the property cycle, get the best mortgage and remortgage and just about every thing in between. All of these aspects are important when becoming a professional ‘money-making’ investor.
Call the team on +44 (0)207 923 6100 (or click the ‘download UK Property Tax book' button below) to get more help on the most current tax issues after UK Budget 2016 and how you can minimize the tax you’ll need to pay under the new tax rules.
Live with passion and fun,
Brett
