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eZine May 07
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UK Buy to Let Taxation – Part 3
I must repeat that neither I nor Viceroy Invest are licensed or qualified to give tax advice. When it comes to choosing a particular tax-saving strategy you MUST discuss it with your qualified Accountant. What we certainly can do, however, is highlight some of the areas where a little investigation may pay dividends. Investor or Trader? Last month we looked at the Capital Gains Tax implications of selling investment property. I said, among other things: "Generally speaking, if you are a regular investor who buys and holds on to the property rather than buying to sell on at a profit, you will be liable for Income Tax each year on the profits from your investment portfolio and Capital Gains Tax on the profit you make when you eventually sell." I said "generally speaking" because there is a significant taxation difference between an "Investor" and a "Trader". What’s the Difference? The italicised paragraph above describes an Investor; someone who buys, holds and possibly (though not necessarily) one day sells. Any monetary income they receive comes from rents rather than increases in capital value. An Investor is liable for Income Tax each year on the profits from letting, but only pays tax on the capital growth when he or she comes to sell. This is known as Capital Gains Tax (CGT) and, in the simplest terms, is levied on the increase in value from when you bought a property to when you sold it. However... a person who buys a property with the intention of refurbishing, developing or simply turning for a profit is considered by the Revenue as carrying on a business, even if it is done in the person’s private name – Sole Trader or Partnership – rather than as a Limited Company or otherwise incorporated entity. In other words, if your motivation is to buy then sell, you are running a business. Any profits you make, even if you simply buy for one price and sell for another without doing any improvements, are liable for Income Tax, not Capital Gains Tax. As always, there will be grey areas along each side of the dividing line and that is where you MUST discuss matters with your accountant. How long, for instance, must you hold onto a property in order to be considered an investor? One month? Six months? One year? Five years? Why Does it Matter? There are plusses and minuses in each case of Investor v Trader, but generally speaking you will pay more tax as a trader (someone carrying on a business) because you pay Income Tax on capital profits and therefore lose the benefit of the £9,200 per person nil-rate band (2007-8) on which you pay no Capital Gains Tax at all. Assuming you both pay tax at 40% and do a development in two names (husband and wife, brother and sister, friend and friend etc.) you will pay £7,360 more tax between you when you sell than if you were investors. Expenses During Ownership It’s not entirely one-sided, however. As an investor, if you visit a property 200 miles away but decide not to buy it, none of the expenses of this trip are allowable against profits from letting. You can only offset the costs of visiting properties you already own. As a trader carrying on a business, however, you can offset these sorts of costs against the general profits of the business. You could probably also reclaim the costs of attending seminars and specialist training courses, which an investor almost certainly couldn’t. Going for Tax Free There is no tax of any kind payable when you sell your home – also known as your "principal private residence". That being the case, why not buy a house, move into it, improve/extend/refurbish it, then sell for a profit. Then do it again, and again, and again... This is a particularly tricky case. If each property is occupied for a few years then there would almost certainly be no taxes of any description to pay. But what if it was just one year? Or less? And have you done it before? I believe there are no hard and fast rules (thus providing lots of well-paid work for accountants and tax inspectors as they argue the toss) but professionals are the only people who can give you sound advice. Interesting! Other Stories...
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