seven property tax strategies

7/29/2019 Seven Property Tax Strategies

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7 Proven Property Tax Strategies

"Growing successful property portfolios and

dramatically reducing your tax liability"

Strategy 1 - Property Partnerships

A great way to boost your annual income and have an

annual holiday courtesy of the taxman!

When I started investing in property, the biggest mistake

that I made was that I never considered buying a propertyin a partnership.

YES - big mistake!

This error was purely due to lack of knowledge and my

belief that it would never have an impact on my taxsituation.

However, when I learned of the benefits of partnerships,you can bet your bottom dollar that I quickly changed

my investments into joint ownership, just so I could

really PAY LESS TAX!

Please print off and file this tax strategy so that you can

get easy access to it whenever you are off-line!

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

'Partnerships - Simple, but very tax effective!'

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

One of the simplest and yet most effective property

tax strategies is to buy a property with multiple ownersin the form of a partnership.

The number of partners is irrelevant, but the two most

important considerations are that

a) your partners must not be higher-rate taxpayers

(by this I mean that they must not be taxed at 40%);

b) they MUST be trustworthy.

The latter point is so important that I am going to stress

it again!

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

Partners MUST be trustworthy!=========================================


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If you buy in a partnership, then you MUST make sure

that the partners with whom you are purchasing are

people that you implicitly trust, i.e., a spouse, yourmother or father, etc.

This is not just for tax reasons but is just simply good

BUSINESS PRACTICE.

As a golden rule, if you are a higher-rate taxpayer, i.e.,

YOU pay tax at 40%, then ALWAYS try to purchasewith either a lower-rate taxpayer or, even better, with

someone who pays no tax at all.

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

'How are partnerships split?'

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

All property owned jointly between husband and wife istreated as an equal 50:50 split as default by the Inland

Revenue.

However, this is not the case for property owned between

non-husband and wife. This is because the propertyownership must be based on fact, e.g., Jo has funded 10%

of the deposit, and Jack has funded 90% of the deposit.

In this case the property would be treated as a 90:10 split

in Jack's favour.

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

'Do you have a non-income-generating partner?'

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

If your partner does not work, then the first 4,745 that

your partner earns through property income will be

exempt from tax!

In addition, the next 2,020 will only be taxed at 10%.

This means that if you pay tax at 40% but have a 50:50split with your non-working partner, then on the basis of

an equal profit of 6,765 from your property income, youwill pay 2,504 less in tax on a yearly basis.

This is achieved just by having the property in joint

ownership!

Even better, over a ten-year period, this would equate to

a minimum tax savings of 25,040!

BUT don't forget, the tax bands change every year, so

your tax saving is likely to be greater than this!


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Now, if you had a choice between paying the taxman

2,504 yearly or spending the same amount on a family

holiday, which would you choose?

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

'But what if my partner does generate income as well?'

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

As long as any of your partners pay tax at a lower rate

than you, then to put it simply, there is a TAX SAVING tobe had!

So don't miss out!

Case study:

------------John is a 40% taxpayer and his wife pays tax at 22%.

Their employment income is 60,000 and 20,000,respectively. They also earn 5,000 each from their

property investments.

Therefore John pays 2,000 tax on his 5,000 property

income, and his wife pays 1,100.

They are saving 900 in taxes per year by not having

the property solely in John's name!

Again, over ten years, this equates to 9,000 in tax

savings!

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

'But what if I have already bought in my sole name?'

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

Don't worry, you won't be the first (I did it before you),

and you certainly won't be the last!

YES, ideally, if we knew there was a significant tax saving,

then we would all purchase in a partnership from the

outset. BUT we learn as life goes on, and that is exactlywhat this strategy is for - to help you to LEARN!

It is VERY EASY to switch a mortgage into multiple

ownership, but most people think it is a long and

complicated process.

Well, it isn't!

It will cost in the region of 300-400 to have a propertytransferred into multiple ownership.

But don't forget, this is NOTHING if you consider thepotential tax saving you could make!


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So, sacrifice a short-term cash outlay for a long-term

tax saving!

Here are the steps you will need to follow.

1. Contact your mortgage lender.

Tell them why you want to transfer. They will then send

you new mortgage forms form for you to complete in jointownership.

YES, that's right, in most cases you effectively have toapply for a new mortgage.

Normally, the property will be put into joint names on thesame terms as the original contract.

However, if interest rates have reduced, then be CHEEKY

and ask if you can also have it at the new reducedinterest rate!

My philosophy is, 'if you don't ask, you'll never know whatthe answer would have been!'

2. Contact a solicitor.

Once your mortgage has been approved, your solicitor

can have all relevant documents changed into jointnames pretty quickly.

It is as easy as that, and it can all be done in about one

month!

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

'Will a partnership BENEFIT me when we decide to sellthe property?'

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

Absolutely, YES!

Now, if you have a property in multiple names, then youwill definitely make a tax saving.

If for no other reason, then this is due to the fact that each

owner will be able to use their own personal CGT allowance,which currently stands at 8,200 per person.

So, this means that if husband and wife own an investmentproperty jointly, then you can reduce any CGT tax liability

by a minimum of 16,400, i.e., 2 * 8,200.

There are also other interesting strategies that can be used


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to reduce capital gains tax further, and these are covered

in tax strategies THREE and SIX.

So, make sure you watch out for them!

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

The next Tax Strategy - in three days' time!=========================================

You may be thinking,

'But what if I can't purchase in a partnership as I have no

trustworthy partner?'

OR

'Both my partner and I are higher-rate taxpayers, so how

can we get a tax saving?'

Well. if you are, then this is great as it means YOU AREthinking about saving on property taxes!

After all, not everyone has a partner with whom they caninvest.

Even if a partner is available, then they may well both behigher-rate taxpayers and therefore there is no income

tax saving at all!

Well, don't worry as the next tax saving strategy reveals

how you can make 10,000 without paying a single penny

in tax regardless of whether you buy in a partnership or

as a sole trader!

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

Well, that's the end of this first Tax Strategy.

I hope that this strategy has shown you how buying property

in a partnership can be a simple and an EXTREMELYtax-effective way to buy a property.

After all, it can save on both income and capital gains tax

liabilities!

If you now realise that you will save tax by having theproperty in multiple names, then start looking around

yourself now to find those family members whom you

know you can implicitly trust!

Convert your solely owned property into multiple ownership

now!


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

Strategy 2 - Using Property Management Companies to Slash Your Tax Bill!

Set up your own property management companyand save pounds in income tax!

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

I am now going to demonstrate another way

to make an even greater tax saving, regardless

of whether you buy properties in your sole name oras a partnership!

Remember, one of the easiest ways of making money

through property is to PAY LESS TAX!

Just like the previous Property Tax Strategy, I

recommend that you print off and file thisstrategy away so that you have easy access to it

whenever you are off-line!

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

Ever wanted to have your OWN company?

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

I am sure you have!

In fact, most entrepreneurs aspire to having theirown company and one day being able to refer to

themselves as being a 'company director.'

But what better way than to be a director of your

own company?

Setting up a company to MANAGE your property

portfolio can be an excellent strategy to make

sure you pay less tax!

So, let's take a look at exactly how it could possibly

benefit YOU!

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

Are you a middle-band taxpayer?

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

Do you pay tax at the rate of 22% or less?

The average income for a person in the UK is just under22,000. So, in all fairness, most of us are middle-band

taxpayers, i.e., we pay tax at 22%.


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We all aspire to have higher incomes.

But, unfortunately, along with a higher income

usually comes more tax.

What if you could have a higher income, yet payno additional tax? Does this sound too good to be

true?

Well, it isn't!

To put it simply, if you are a property investor whosatisfies the following two conditions, then you will

DEFINITELY pay less tax if you set up and run a

property management company:

a) your company makes less than 10,000 and retainsthe money in the company;

b) your property gives you at least a 400 annual

income before tax.

The reason for the latter condition is that it can

cost up to 400 to create a company and have the

annual business accounts done, so you needto be making at least a profit of 400 from your

properties.

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

How will a property management company

save me tax?

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

TAX TIP - If a company makes an annual profit of less

than 10,000, then the amount is exempt fromcorporation tax if it is retained within the company.

Corporation tax is also referred to by some people

as company tax.

If less than 10,000 profit is made by the companyand it is withdrawn by the way of a dividend, then

corporation tax is paid at a rate of 19%.

Sounds GREAT: Well, it is exactly that!

Let me illustrate with the following case study.

------------------------------------------------

Mr. Jones, a bachelor, is an employed car

mechanic and has an annual income of 18,000.


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He also has five residential investment properties

from which he generates an annual profit of 9,000

per annum.

On this profit he is liable to pay 1,980 in income

tax on an annual basis.

However, Mr. Jones knows that he can save on tax,

so he sets up a Ltd. company with his mother.

He also draws up a formal contract between the

company and himself, where the company

charges 750 per month for providing all lettingsand management services for the properties; that is,

his company acts as the letting agent.

These services include ongoing maintenance,

repairs, monthly property inspections, and allother aspects of tenant and property

management.

This means that over the year the 9,000 annual

profit from his properties is paid directly intothe company by the way of 12 equal instalments

of 750.

John decides to retain the money within the

company and therefore is exempt from paying

corporation tax on the 9,000.

YES, THAT'S RIGHT - he pays NO company tax on

9,000.

This means that over a ten-year period he could

build up a very tidy 'nest egg' of 90,000.

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

'Do I need to draw up a formal contract

with my company?'

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

The answer to this question is YES.

DO NOT set up a company and just start paying

money into the company. The reason for this is

because the Inland Revenue could challenge you(if you are ever investigated) for making

artificial transactions to avoid paying tax.

Just drawing up a simple contract outlining

the services that your company is providing to you

will help to prevent such a challenge!


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

Beware of artificial transactions!

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

Property tax specialist Arthur Weller advises that

you need to be careful about trying to create

artificial transactions that are aimed at avoidingtax.

Don't think that you can do this if you justhave a single property!

The charges must be believable.

What I mean here is that if you have a single

property, then you can't pay 750 a month forproperty management-related charges. It is just

not believable - especially if Mr. Taxmaninvestigates you.

Pay an amount into a company that IS believable

and relates to the property. In fact, just charge what

many letting agents do and have your own companycharge you 15% of the rental income you receive.

So, this means that for

- A rental income of 400pcm you can pay your

company 60pcm;

- A rental income of 800pcm you can pay your

company 120pcm;

- A rental income of 1,200pcm you can pay your

company 180pcm.

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

'How do I go about setting up a company?'

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

This is easy.

Your one-stop shop for setting up a company should

be

www.companieshouse.gov.uk

Here you will find out all you need to know about

setting up a company, and it can be done within24 hours.

So, start thinking of a cool company name now!


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Alternatively, get your accountant (if you have

one) to set one up for you.

It shouldn't cost you much more than 100.

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

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

Well, that's the end of this SECOND Tax Strategy.

I hope that this strategy has shown you how

setting up a company can be a simple but

EXTREMELY tax-effective way to DRAMATICALLYreduce or even wipe out any annual income

tax liability.

If this strategy will save you tax, then

consider setting up a company ASAP, and startputting more money into YOUR pocket.

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

Strategy 3 - Pay No Property Capital Gains Tax

Maximise the 'private residence relief'

to wipe out your property capital gains tax

liability.==========================================

Don't forget: The main reason why we invest inproperty is to make SERIOUS money when we come to

sell the property.

After all, why should we have to move to the Middle

East to benefit from tax-free income, when through

some careful planning we could just as easilyachieve it here, by investing in property!

One of the easiest ways of making money throughproperty is to pay less tax.

And an even better way is to PAY NO TAX at all, by

utilising legitimate tax-planning strategies!

Just like the previous strategy, I recommend that

you print off and file this strategy away so thatyou have easy access to it whenever you are off-line.

So, let's get on with this next strategy!

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


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How much do you want to make from your investment?

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

The reason I ask you this question is because

we have all thought about it before we purchased

our properties.

If you are a reserved investor who has invested

in the cheaper two-bed terraced houses, then maybe

you have thought about a 50,000 profit when yousell your property.

Or, alternatively, if you are a more ambitious oradventurous investor, investing in an u- market

area, then you might expect around 150,000.

Either way, when you were thinking of your

long-term profit targets, did you ever think abouthow much tax you might you have to pay when

you eventually sell your property?

I bet you never did!

Well, consider the following.

If at the time of selling your property you area higher-rate taxpayer, then you can kiss

goodbye to a maximum 20,000 of profit, or

60,000 if you are a more ambitious investor!

OUCH! There went your Porsche or your luxury holiday!

Over the past two or three years alone, such gainshave been realised almost all over the country,

yet most people have had to accept the huge tax

liabilities.

Well, there is no need to do this going forward,

especially if you put this strategy firmly into

your mind!

If you follow either of the two strategies belowand your investments give you your expected

returns, then YOU WILL have a tax-free gain to do

with as you please.

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

Make your investment property your HOME!

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

If you make your investment property your

primary residence, then you will benefit froma whole raft of tax reliefs that can


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ULTIMATELY absorb ALL your tax liabilities.

There are two ways to achieve this.

a) Live in the property before you let the property.

This is what the really smart investors havebeen doing, especially those who want to just buy

one or two investment properties and gradually grow

a portfolio.

This is an excellent tax strategy as you do

not have to pay CAPITAL GAINS TAX on the lastthree years that you owned the property.

This is regardless of how much the propertyprice has increased during that period.

To put it SIMPLY:

If you bought a property, lived in it for two years,

and then rented it out for the next three years,

then you have a ZERO capital gains tax liability!

This is regardless of how much money YOU made.

All you have done here is legitimately exploited

the 'private residence relief'!

b) Let the property, and then live in it before you

sell it!

This strategy is, again, really for those people whoare looking to grow relatively small portfolios

over a period of time.

Again, all you are doing here is exploiting the

'private residence relief' rule.

The only difference is that you are living inthe property after it has been let.

Here are a couple of short case studies.

Case Study (1)

-------------------John, a higher-rate tax payer, buys a property in

April 1999 for 90,000 and rents it out for two

years before moving into it for one year.

He then sells it after he has completed three

years of ownership for 160,000.


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Here there is no capital gains tax to pay as

the last three years of ownership are exempt

from tax!

So, John has 70,000 to spend however he likes!

Had he not lived in the property for a year, thenhe would have been subject to a maximum

28,000 in tax. OUCH!

Case Study (2)

-------------------

Joanne buys a property in 1997 for 70,000.

She lives in the property for three years, after

which she meets her husband-to-be and moves inwith him in 2000.

She rents out her property for the next three years

and then decides to sell it in 2003 for 150,000.

Joanne has ZERO tax liability.

This is because the three years that she lived in

the property are exempt from tax as it was her

'main residence.'

In addition to this exemption, the last three years

that she rented out the property are ALSO exempt.

This means that she has a WHOPPING 80,000

cash lump sum, to do with as she pleases!

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

That's not all - more CGT savings

are available!==========================================

In this strategy I have only talked about one

relief - the MOST POWERFUL 'privateresidence relief.'

However, there are a whole raft of other reliefs

that are available, which could be used to

wipe out any other tax liabilities, even if you are

not able to use the 'private residence relief'!

After all, let's face it: If you are going to become

a SERIOUS property player, then it won't bepossible for you to live in each and every one

of your properties.

It just won't be possible!


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It is still possible to wipe out any CGT liability

by using any one or a combination of the followingreliefs:

- indexation relief;

- private letting relief;- allowable losses;

- personal CGT allowance;

- taper relief;- plus more.

==========================================Track your capital gains tax liability!

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

Strategy 4 - Make Sure You Know When You CAN and

When You CANNOT Offset Interest Charges AgainstYour Property Income==========================================

Each of the tax strategies provided have demonstrated

how YOU can slash both

your capital gains and income tax liabilities, just byfollowing some simple strategies.

However, one question that pops up time and time

again is

'What types of 'interest' can be offset against my

property income?'

It is common knowledge that it is possible to offset

'interest' payments against property income.

However, what the vast majority of investors don't

understand is exactly what types of interest can andcannot be offset against property income.

Well, don't worry as in this strategy I will explainand illustrate THREE different types of interest that

you can offset.

Remember: 'knowledge is power,' and the more youknow about property tax, then the greater chance you

have of reducing it.

No doubt, most of you will be paying some or even

all of these types of interest, so it means that you

CAN start reducing your tax liabilities further!

Just like the previous Property Tax Strategy, I


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recommend that you print off and file this

strategy away so that you have easy access

to it whenever you are off-line!

So, let's get on with learning what they are!

==========================================1. Interest on mortgages

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

It is probably fair to say that this is the most

common type of interest that is associated with

property investors.

This interest relates to the amount you pay back

to your mortgage lender that is above and beyondthe initial amount that you borrowed.

It does not matter if the mortgage is a 'repayment'

or an 'interest-only' mortgage. The fact thatinterest repayments have been made means that

they can be offset.

Let me illustrate this through the following case

study.

Case study (1):

-----------------

John buys an investment property for 100,000.

The finance for the property is made up of a

20,000 deposit (provided from his personal

savings) and an 80,000 buy-to-let mortgage,provided by the NatWest bank.

In the first year of the mortgage he pays 2,500in interest. This WHOLE amount can be offset against

his income from the property.

This means that if he received 5,500 income fromhis property, then he would only be liable to pay

tax on only 3,000!

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

2. Interest on personal loans

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

If you take out a personal loan that is used 'wholly

and exclusively' for the purpose of the property,then the interest charged on this loan can also be

offset.

The important point to note here is that personal


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loans MUST be used in connection with the property.

Here are some examples when the interest chargedon a personal loan CAN be offset against the

property income.

a) Loan used for providing deposit.

Most buy-to-let mortgage lenders require you to

provide a 20% deposit before they will lend youthe remaining 80% in the form of a mortgage.

If you don't have the 20% deposit readily available,then it is likely that you may well need to finance

the deposit by getting a personal loan.

If you do take out a personal loan for the 20%

deposit, then the interest charged on this loan CANbe offset against the property income.

If you are considering or have already done this, then

what this means is that you have a 100%-financed

investment property, where interest charged onboth the mortgage and the personal loan can be offset

against the rental income.

b) Loan used for refurbishments/developments.

Periodically, you will need to refurbish or evendevelop a property.

Imagine that you have just purchased a property

that needs total redecorating and modernising.

If you take out a loan for carrying out this work,

then the interest charged on the loan can be offsetagainst the property income.

Alternatively, you might decide to embark on a

more expensive property extension, i.e., build aconservatory.

Again, the same rule applies here - the interest

charged on the loan can be offset.

c) Loans used for purchasing products.

If you purchase goods from retailers where finance

is available, and these goods are used in yourproperty, then again, the interest charged can be

offset.

This is more likely to happen if you are providing


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a fully furnished property, i.e., a luxury apartment.

If this is the case, then you may decide to buy themore expensive items on finance.

Such items are likely to include

- sofas, dining table & chairs, beds;

- cooker, washing machine, fridge/freezer;

- carpets, flooring, etc.

If you are paying for these products over a period

of time, e.g., 6, 12, or 18 months, then any interestcharged can be offset.

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

OK, so you now know typical scenarios in which youcan offset interest payments.

Well, what about some scenarios in which you can't

offset the interest payments?

Good question!

Here are some examples when the interest chargedon a personal loan CANNOT be offset against

the property income:

a) loan used for paying for a family holiday;

b) loan used for buying a new car;

c) loan used for paying children's tuition

fees, etc.

It is clear from the above examples that all these

scenarios have one common characteristic:

*** They have ABSOLUTELY NOTHING to do with

the property investment! ***

So, suffice it to say that if the loan has nothing

to do with your property investment, any interestrepayments CANNOT be offset.

My best advice on this is to keep things simple

and always ask yourself, 'Is the loan being usedfor the sole purpose of my property?'

If the answer is 'YES,' then you can offset theinterest.

If the answer is 'NO,' then you cannot offset theinterest.


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

3. Interest on remortgage==========================================

If you have a mortgage on your investment property,

then it is highly likely that you will consider movingto another lender at some point.

The main reason for this is likely to be becauseyou are looking for a better mortgage deal.

As interest rates have been falling over the pastfew years, more and more people have been

remortgaging their investment properties to

capitalise on the better deals and to help growtheir property portfolios.

Here are some pointers about remortgaging.

a) If you remortgage your outstanding mortgage

with another lender, then you can STILL offset

the interest repayments.

Case study 2:

---------------Timothy has an outstanding mortgage balance of

50,000 on his investment property. He decides to

move his mortgage from the NatWest to LloydsTSBas they are offering a lower rate of interest.

Timothy can still offset the entire interest charged

by LloydsTSB on the 50,000 remortgage.

----------------

b) If you remortgage for a lower amount, then

you can still offset the whole interest.

Case Study:--------------

This study begins similarly to the previous example,where Timothy has an outstanding balance of 50,000

on his investment mortgage.

However, he inherits 20,000 from a family member.He decides to use this toward lowering his mortgage

liability.

Therefore he only remortages to the value of

30,000 with LloydsTSB.

Again, the entire interest charged on the 30,000


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can be offset against the property income.

c) If you remortgage for a greater amount, thenyou can only offset the additional amount if it is

used for the purpose of the investment property.

As property prices have sharply risen over thepast few years, investors have being remortgaging

their properties for higher values.

This is known as 'releasing equity.'

If you have released equity or are consideringdoing this, then you need to follow the guidelines

given above regarding the interest charged on

personal loans.

You need to ask yourself, 'Is the additional equityrelease being used for the sole purpose of my

property?'

Let me illustrate this through the following case

study.

Case study

--------------Timothy has an outstanding balance of 50,000

on his investment mortgage.

However, his property value has appreciated

considerably, so he decides to remortgage with

LloydsTSB for 80,000.

This means that he is releasing additional equity out

of his current property to the value of 30,000.

He decides to use the equity release in the

following way:

- 20,000 is used to fund a new propertyinvestment, and it provides the deposit for his

next buy-to-let investment;

- 10,000 is used to pay for a new car for his wife.

Now, Timothy can ONLY offset the interest chargedon both the outstanding mortgage balance of

50,000 and on the 20,000 he is using as a deposit

for his next purchase.

This is because this combined amount of 70,000

is used 'wholly and exclusively' for his propertyinvestments.


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However, he CANNOT use the interest charged on

10,000 for buying the car as this cost is notassociated with his property investments.

-------------

Right at the outset of this strategy, I mentionedthat 'knowledge is power.'

Having read this strategy, you will now appreciatethat the more you know about property tax,

the more you can plan ahead and reduce it.

Just as important is the fact that your tax education

will help you from getting into unnecessary trouble

should you be unlucky enough to be investigated.

Strategy 5 - Will a Ltd. Company Improve YOUR

Tax Position?==========================================

Some of the most burning tax questions property

investors have are

- 'Should I buy my property through a Ltd. company?'

- 'Should I move my properties into a Ltd. company?'

- 'If I own my properties in a Ltd. company, will I

avoid paying property tax?'

If you have not already asked these questions, then I

am certain you will be doing so in the near future,

especially if you intend to continue investingin property and growing your portfolio.

To be honest, answering these questions is notstraightforward (tax never is!), and the answers

depend on your

a) chosen investment strategy;

b) personal and financial circumstances/ambitions;

c) for how long you intend to hold the properties.

However, before you even decide whether a Ltd. company

will improve your tax position, there are some very

basic rules/guidelines that must be understood.

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

Already a property investor?==========================================


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Do YOU already own investment properties?

Are you already on the buy-to-let investment ladder?

If the answer is YES and you are now wondering

whether moving your properties into a Ltd. company

is a good idea, then consider the following FACT:

*** Properties must be transferred into a Ltd.

company at market value! ***

Yes, that's RIGHT!

Moving properties into a company is treated in the

same way as if you were selling the properties!

What this means is that if you bought your investment

property five years ago and you would now like to moveit into a Ltd. company, then you are likely to have to

pay an IMMEDIATE capital gains tax liability.

This is purely due to the fact that property prices

have significantly increased over the past few years!

The exception to this rule is if the property is

your principle private residence.

Case study:

--------------Alex bought five investment properties between 1992

and 1996.

Their combined purchase value was 250,000.

However, now they are worth a combined total of

550,000; that is, the combined value of his portfoliohas more than doubled!

By transferring the properties into a company, he

may be hit with an immediate tax liability of up to120,000 if he is a higher-rate taxpayer.

OUCH!

Hmmmm, it may not be a good idea to transfer them

in this case!

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

Do YOU really know what 'limited liability' means?==========================================

I must admit, when Amer considered moving hisportfolio into a Ltd. company, I asked him 'why do


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YOU want to do it?'

He gave me two reasons:

a) to cut his tax liability (if it was possible);

b) to limit his personal liability - here he wasthinking of the worst case scenario, where if 'his

whole world fell apart,' then he would escape from

the banks and creditors!

Now, I have already explained that moving properties

into a company can instantly trigger a capital gainstax liability.

Therefore he wasn't prepared to pay this tax liabilityNOW!

To the latter point, I replied that

'Limited liability is a bit of a myth. Do you really

think that a finance company will lend you huge

amounts of money and limit YOUR liability in payingit back?'

This got Amer thinking!

And I responded further:

'They will want personal guarantees. After all, why

should they take such a HUGE risk and let you get

away with ZERO liability?'

What this meant was that if Amer's whole world did

fall apart, then he WOULD still be personally liable

to pay everything back.

This means that the creditors/baliffs would be

knocking on his door pretty quickly to get it all

back!

Well, that quickly dismissed his second reason forwanting to move his portfolio into a Ltd. company!

Suffice it to say that it just was not beneficial for

him to do it!

So, just let me clarify these two important factors

again, and PLEASE read them AGAIN if you are consideringmoving properties into a Ltd. company.

1) If you have an existing portfolio (of any number ofproperties), then you will be liable to capital gains


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tax if you want to move them into a company.

ALSO

2) Your personal liability is never LIMITED in a Ltd.

company.

This is because your lender will WANT personal

guarantees that you will pay back the money if

things go wrong!

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

'But what if I am thinking of buying my first propertythrough a Ltd. company. Is it beneficial then?'

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

Good question!

I will try and keep this simple.

As a general rule, if you intend to reinvest the

money you have made through your property investments,

i.e., you want to continue reinvesting the profitsinto acquiring more properties, then it WILL be

beneficial.

There are three SIGNIFICANT tax benefits of growing

a property portfolio through a company.

These are explained below.

a) The first 10,000 that a company makes can be exempt

from company tax.

You will not have to pay any company tax on profit

that is equal to or below this threshold level if themoney is retained within the company.

b) Lower-rate tax savings.

As a higher-rate taxpayer, you pay 40% on your profit

and gains. For a limited company the tax rates arebetween 0% and 30% - a potential HUGE tax saving.

c) It is possible to wind up your company in a tax

-efficient manner.

What this means is that if and when you decide to sell

your company, you can do it in a way that could knock offtens or even hundreds of thousands of your tax bill.

=========================================='So, what are the other BENEFITS of owning property


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through a Ltd. company?'

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

Here are some more favourable benefits to consider

when deciding whether to own your properties through

a Ltd. company.

- A company can define its own accounting period.

However, it can not exceed 18 months.

- You only pay stamp duty at 0.5% when purchasing

company shares.

- Indexation relief is still available for any capital

gains.

- Lower tax rates can be expected as companies pay tax

between 0% and 30%.

- The first 10,000 a company makes is tax-free.

- Properties can be transferred within companies without

incurring a tax liability.

- You can grow a portfolio more quickly within a company

by continuing to reinvest the profits and thus deferringany tax.

- Dividends can be extracted from a company in a tax-efficient way.

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

'So, what are the other DRAWBACKS of owning propertythrough a Ltd. company?'

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

Here are some more drawbacks that you should

consider before deciding to own your properties

through a Ltd. company.

- Companies cannot use the annual personal CGT

allowance. This allowance is 7,900 for the taxyear 2003-2004. This means that if you had a

property in joint ownership, then you would lose

out on a combined capital gains allowance of

15,800!

- Official company accounts must be produced. The

cost of drawing up such accounts can be 3-4times more expensive than having your sole-

trader accounts drawn up.

- Banks are less reluctant to lend money to you


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if you are purchasing through a company.

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

Strategy 6 - Transferring & Gifting Properties to SLASH

Your Tax Bill!

Don't let YOUR death burden YOUR family with tax bills!

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

Hi Alan,

As I mentioned at the end of the previous Tax Strategy

- INHERITANCE TAX is FAST becoming a 'tax bombshell.'

Unless YOU start planning for this tax NOW, you run

the risk of leaving your loved ones with significant

tax liabilities in the future.

In this strategy I will outline some simple yet very

effective methods you can use to limit the tax

liabilities on both yourself and your loved ones.

So, let's get on with this strategy and start to

understand how you can tackle the issue of inheritancetax now!

Just like the previous property tax strategy, I

recommend that you print off and file this strategyaway so that you have easy access to it whenever

you are off-line!

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

What is inheritance tax (IHT)?

===========================================Inheritance tax is commonly referred to as both a 'gift

tax' and also as a 'death tax.'

If, during your lifetime, you 'gift' part or the whole

of your estate, then the inheritor will be liable to payinheritance tax.

Similarly, if, at the time of your death, you pass on

part or the whole of your estate, then again, the inheritor

will be liable to pay inheritance tax.

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

Is there an IHT allowance?===========================================

YES - but it is not really that favourable, given the

property price increases over the past few years.

For the 2004-2005 tax year, the IHT threshold level is


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263,000.

Anything above this amount is taxed at 40%, i.e., atthe highest rate.

This means that if, at the time of death, your whole

estate is valued at less than 255,000, then the inheritorwill have no tax to pay.

But, if it is over this amount, then anything above the263,000 threshold level will be taxed at 40%.

Case study:--------------

At his time of death, John had an estate that was worth

240,000. His estate was made up by his house, which isworth 200,000, and he has 40,000 cash.

He gifts his entire estate to his son.

His son will have no IHT liability as it is below the

threshold level.

--------------

Now, given the dramatic property price increases overthe past few years, this threshold level seems to

be VERY LOW.

If parents living in London and the South East, in

particular, were to pass away today, then it is highly

likely that they would trigger an immediate tax liability

on their loved ones.

This is because a very large number of properties in

these areas are already valued at above the thresholdlevel!

The average property price in the UK in 2020 is

predicted to be in excess of 330,000.

This means that more and more people are going tobe subject to this tax liability in the future - especially

if the 2004 budget is anything to go by as the threshold

level only increased from 255,000 to 263,000!

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

One VERY important point to note!

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

a) If YOU die tomorrow and leave the estate to your

children, then any IHT liability is due immediatelyby them.


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Case study:

--------------Death befalls both Albert and his wife.

Their estate is valued at 355,000, which is gifted to

their son. He must pay 40,000 in taxes before hecan take ownership of the estate.

--------------

Now, in this above example, if the estate was made up

entirely from the value of the property, in which theson lived, then it may well be a case of having to

sell the property in order to pay the tax liability!

Not ONLY is there a significant TAX burden but

also a huge inconvenience for the son.

===========================================FOUR ways to reduce inheritance tax

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

Here are four common ways of reducing inheritance tax.

a) Utilising the 263,000 threshold level.If circumstances are such that your estate is not

worth more than the current threshold level, then

as mentioned earlier, there is no tax liability forthe inheritor.

However, as we have seen earlier in this strategy,

this scenario is becoming more and more unlikely!

b) Gifting to a spouse.

All gifts between husband and wife are exemptfrom tax, as long as they both live in the UK.

This means that even if a husband has an estate

valued at 10 million pounds, then he can gift thisto his wife.

It does not matter if it was gifted during his lifetime

or at the time of his death; his wife will incur no tax

liability.

c) Gifting as soon as possible during your lifetime.

During your lifetime it can be tax-beneficial to gift

sooner rather than later, especially if you know whoyour estate is going to go to.

There are two significant benefits of gifting duringyour lifetime.


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i) The longer you live, the less tax your inheritors

will have to pay.

This is because there is a scaling taper relief that

is available, which reduces the amount of tax that

is liable.

So, if you transfer a property or gift it away and

survive for seven years, then the inheritor will haveZERO IHT liability.

ii) You can use the IHT allowance again.If, after gifting, you survive for more than seven years,

then you can use the IHT allowance AGAIN!

This means that if you gift properties to the value

of 125,000 each to your son and daughter andsurvive for seven years, then you can use the IHT

allowance to gift up to 263,000 again!

d) TRUSTS

You have already learned that husband and wifeincur no IHT liability when gifting to each other.

However, if you want to gift to your children,then setting up a trust may be the best option.

Trusts can be used to hold properties as well asother appreciating assets such as stocks and shares.

Properties can be placed into trusts in a tax-efficient

manner, which can help to significantly reduce andeven avoid capital gains or inheritance tax.

There are a number of different types of trusts thatcan be set up to make tax savings.

Each has its own merits and is suitable for

different scenarios.

I strongly recommend that if you are consideringtransferring to your children or other members of

your family, then you take tax advice from a TRUST

expert.

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

DON'T forget YOUR capital gains liability!

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

Remember, if you decide to gift/transfer a property,

then YOU are still liable to pay capital gains tax onany profit that YOU have made.


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If you transfer/gift a property, it does not eliminate

YOUR OWN tax liability.

DON'T forget this important point!

Timing of the transfer is CRUCIAL.

If you are not careful, then when you gift/transfer,

YOU could be hit with a CGT bill and your inheritorwith an IHT bill!!

OUCH - this is what I call a serious double tax whammy!

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

===========================================Strategy 7 - 10% Wear and Tear or Renewals?

Choosing the RIGHT method can save you

tax!===========================================

In this final tax strategy I want to talk abouttwo different methods you can use to cut your

annual income tax bill.

These two methods are known as

- the 10% wear and tear rule;

- the renewals basis method.

They are relatively simple strategies to understand,

and they both relate to the furnishings providedin a property.

However, so many investors get confused by notknowing which method they can use and how it will

affect their annual property income tax bill.

Choosing the right one can have a significant

bearing on your tax liability.

So, let's get on with this strategy and start tolearn more about both methods so that YOU can decide

which one is best suited to your situation.

Just like the previous property tax strategy, I

recommend that you print off and file this strategy

away so that you have easy access to it wheneveryou are off-line!


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

'What is the 10% wear and tear allowance?'

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

It is an allowance that the Inland Revenue has

introduced to make the lives of property investors

easier when they are completing their annual taxreturns.

In a nutshell, it allows you to offset 10% of yourannual rental income against your property income

tax bill.

This sounds straightforward, and in principle, it

is.

However, there are some important points to note.

a) If your rental income includes charges that

would normally be borne by a tenant, then thesehave to be deducted before you calculate your

allowance.

You will understand this better in a case study that

follows later.

b) It does not matter how much YOU spend on furnishing

your property.

You can only offset 10% of your RENTAL INCOME.

c) If you use this allowance, then it MUST be used for

the duration of the property ownership (unless itbecomes a partly furnished or unfurnished property).

==========================================='When can the 10% wear and tear allowance

be used?'

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

This allowance can ONLY be used for a FULLY FURNISHEDproperty.

It cannot be used for an unfurnished or even a partly

furnished property.

A fully furnished property is one that a tenant canstart living out of as soon as they move in.

In such a property, there will be no need for thetenant to go and buy any items such as furniture,

electrical appliances, bedding, or even crockery.

The only accessories that the tenant needs to provide


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are his/her own personal belongings!

==========================================10% wear and tear case studies

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

Here are a couple of case studies to illustrate theuse of this rule.

Case study 1:----------------

John rents out a fully furnished property.

He receives a monthly rent of 500.

The tenant is responsible for all property bills(e.g., utility bills) and services provided to the

property (e.g., gardening).

The annual income for the property is therefore6,000.

This means that John can offset 600 against hisrental profits.

Case study 2:----------------

This scenario begins similarly to above, but this time,

John is charging 600. He charges an extra 100 becausehe pays the utility and gardening bills himself.

The annual income is now therefore 7,200.

John CANNOT offset 10% of 7,200 against his rental

profits.

He firstly has to deduct the costs that would normally

be borne by the tenant. In this case, it is 100 per

month.

Therefore he can only claim 10% on 6,000 (7,200

- 1,200), which relates to 600.

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

'What is the 'renewals basis' method?'

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

The renewals method allows you to offset the cost

of 'renewing' or 'replacing' an item in a property.

This replacement method can be used for a fully

furnished property, an unfurnished property' oreven a partly furnished property.


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Unlike the 10% wear and tear allowance, there are

no restrictions as to when this rule can be used.

However, there are some important points of which

you should be aware if you decide to use this method.

a) You cannot offset the initial cost of an item!

This is a VERY IMPORTANT point, which many landlords

get caught out with.

If you purchase a property and decide to fully furnish

it with new or even second-hand items, then youCANNOT offset the cost of providing these furnishings.

You can only offset the costs of these furnishingswhen you come to RENEW them!

b) If you use this allowance, then it MUST be

used for the duration of the property ownership.

You cannot move to the 10% wear and tear

allowance at a later date.

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

'Renewals basis' case studies==========================================

Here are a couple of case studies to illustrate theuse of this rule.

Case study 3:

----------------Roy buys a new house and decides to let out his

previous main residence (REMEMBER, this is an

excellent capital gains tax saving strategy as perTax Strategy 3).

He leaves the existing furniture in his old house

and decides to use the renewals basis.

Two years later, he spends 4,000 renewing all thefurniture in the property.

This whole amount can be offset against his annual

property income tax bill.

Case study 4:

----------------Alex buys a brand-new luxury apartment in the city

centre.

He decides to spend 7,000 on 'kitting it out' with


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the best furniture and appliances.

Unfortunately, none of this can be offset against hisproperty income tax bill because they are all 'initial

costs'!

==========================================How to decide which method to use?

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

There are a number of factors you should consider

before deciding whether to use the 'renewals basis'

or the '10% wear and tear' allowance.

These are outlined below.

a) Furnished, unfurnished, or partly furnished?

Remember, you can only use the 10% wearand tear rule for a fully furnished property!

The 'renewals basis' can be used for an

unfurnished, partly furnished, or even a fully

furnished property.

b) Consider the cost of fully furnishing a

property!

If you are buying a property and are going to

let it out fully furnished, then you MUSTconsider the costs you are going to incur in

initially furnishing it.

If the cost is going to be high, as demonstratedin case study 4, then it may be better use the

10% wear and tear allowance.

This is because of the following.

- You will be providing high-quality furnishings

and will not expect to replace them for a goodfew years, i.e., 5-7 years.

Therefore you will have to wait this period of

time before you can claim the 'renewals' basis.

- If you decide to sell the property before yourenew the furnishings, then by using the

'renewal basis,' you will not have managed to

offset any renewals cost at all against yourproperty.

However, if you use the '10% wear and tearallowance,' then you can claim this from the


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date you purchased the property.

c) Consider how often you will need to replacethe furnishings.

If you believe that you will need to renew them on

a regular basis, i.e., 2-3 years, then it may well bebeneficial to use the 'renewals basis.'

This may particularly be the case if you areproviding accommodation to students.

If you don't expect to replace it for at least 5years, then the '10% wear and tear' rule may

be more suited.

d) Consider when you plan to sell.

If you plan to sell the property quickly, i.e., in

less than five years, then it is extremely unlikelythat you will want to by new furniture.

Again, you might be best suited to opt for the10% wear and tear method.

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

seven property tax strategies

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