By Simon Misiewicz I have decided to write a blog series that captures my experience of dealing with over 1,000 property investor clients over the past 10 years. My discussions with clients along the way have enriched my knowledge and understanding of what makes a successful property investor. I am going to cover the following subjects with you:
- Part 1 of 9: Why mortgages are the thing of the past
- Part 2 of 9: The end of buying properties in your own name and why Limited Companies are the only way forward
- Part 3 of 9: Lose it all – the risk of holding residential property investments
- Part 4 of 9: You are immortal and do not need to worry about legacy planning. Really?
- Part 5 of 9: The problem with your Joint Venture partners screwing you over
- Part 6 of 9: Why the heck are you doing all this anyway?
- Part 7 of 9: Why you will be poor at retirement
- Part 8 of 9: Why not just buy another poorly-performing assethttp://www.optimiseaccountants.co.uk/property-investing-from-2018-part-1-of-9-why-mortgages-are-the-thing-of-the-past/#.WenNxEyZPBJ
- Part 9 of 9: Why commercial properties are the new black
Section 24 – Mortgage interest relief
There’s a lot of contrasting opinions on social media and throughout the accountancy profession. I am sure that my opinion is very relevant to one section of the investors space and not to another. You will quickly understand which camp you are in and will continue to read this, or leave the web page after reading the next few lines.
Whether you are a career professional, a GP/locum, a full-time property investor and financially successful, one thing is clear. You are, or will soon be, a high rate tax payer. I am not going discuss the details, as you can see the analysis in our other article here. In a sense I was saying to people that they should not have a mortgage, which I expressed in more detail in Part One of this series.
I feel that the only people that will make money out of property investments will be HMRC and the banks. That is, unless you change strategy and find a new structure that is a) tax efficient and b) is sustainable to take into your family needs for the future (what I call family estate and legacy planning).
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Limited Companies give so much more flexibility
I remember an article that talked about wealth planning considerations when setting up a Limited Company. In this article, we explained how different share classes can be set up to give maximum flexibility of extracting money out of the Limited Company for the family as a whole. More can be read about share classes in our other article here.
I also highlighted, in another article here, the fact that the company can pay for your children’s education provided that you have the right supplier on board and the right structure for payroll. Once you start the process of family planning you wont want to stop. You can also start to minimise IHT through the transfer of shares from parents to children and grand children over many years. If you have a business that can be classified as a trading business, then holdover relief can be applied to mitigate IHT in full.
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I have provided financial and wealth planning sessions for over 100 clients. This is the type of service that does not just look at the tax return for the preceding year; it focuses on the future aspirations of the property investor, and the family structure to meet their lifestyle needs. The greatest concern I see from property investors is that they do not know when enough is enough. I think it is time that property investors understand what they want and need. Once this is established, it is about buying the right investments that provide tax-efficient income to meet the desired lifestyle. Learn more about our Finance, Wealth and Tax Planning service – Click Here Please use the redeem code “Article 33” to get 33% off your wealth planning call. Face-to-face in our Nottingham office.
Extracting cash out of a Limited Company
For me, the biggest benefit is not all of the above. The biggest benefit is that you are only taxed on the money you extract. Let me explain this in some detail. Let us imagine that Property R Us Lincoln Limited made £200,000 profit. Jason who is the owner of the business, did not want to take any money from the business and would rather re-invest it, as he is paid very well from his full-time employment. We know that the company has a tax rate of 19%, which is £38,000.
Now, let’s imagine that the properties were not held in Property R Us Lincoln Limited, but held in his own name. We know that he is a high rate tax payer. We also know from our previous articles that high rate tax payers could face a tax bill between 40% to 135% on all of their profits. Let’s imagine that Section 24 does not affect Jason with too much significance, but his tax bill still increases to 50% of his profits. That means that the tax liability for his property portfolio would be £100,000.
What would you rather pay £100,000 in tax because the properties were in your own name or £38,000? Let’s not forget that the corporation tax could be further reduced by making contributions to Jason’s pension fund. You can read more about extracting cash out of a Limited Company here.
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