By Simon Misiewicz
Are you sick and tired of the fact that the level of tax seems to be increasing with every budget announcement?
Would you like to be even more tax efficient than ever before?
2015 budget changes = more tax
The budget announcement had a number of implications for property investors, which I wrote about in more detail in my previous article. Briefly, these include:
- The mortgage interest relief cap
- Removal of the 10% wear & tear allowance
- Decrease of capital gains tax (CGT) rates but not for property investors
- 3% stamp duty land tax (SDLT) surcharge
- Reduction of the pension lifetime allowance
There are a lot of annoyed people — some of whom are holding investment properties which make no profit and yet the government will be forcing these investors to pay tax. It’s unsurprising that some property investors are starting to feel paranoid and annoyed.
The government has previously said that people do not save adequately for the future but it is now punishing those that invest for the future.
Can you relate to the above? If you have answered yes, then keep reading for some ways to beat the government’s tax hikes.
Is there another way?
Given that the SDLT 3% surcharge applies only to residential properties, many investors are turning to commercial properties; some with plans to flip, others looking to hold onto them.
You could also think about converting commercial property into residential property. First introduced in 2013, temporary permitted development rights have allowed offices to be converted to new homes without the need to apply for planning permission. Between April 2014 and June last year, almost 4,000 conversions were given prior approval (although planning permission was not needed, developers were still required to gain a local authority’s approval).
The scheme had been due to end this year, but late last year it was announced that these permitted development rights would be made permanent. In addition, those who already have approval will have three years in which to complete the change of use – ending potential uncertainty for developers and enabling the development of much-needed homes.
Reduce the SDLT
As we saw in the budget announcement, property investors buying second residential properties will be expected to pay a 3% SDLT surcharge. However, this 3% surcharge will not apply if you buy a residential property that is part of a mixed use commercial building, which I wrote about in more detail in a previous article.
Therefore, if you buy a commercial building with a flat above you will avoid the 3% surcharge on both the commercial element and the residential element as the property is mixed use, and mixed use properties are charged at commercial rates.
Reduction of VAT on conversions
I have previously written an article about how you can reduce the VAT on the cost of refurbishment when converting a commercial property into a residential property. Where you would ordinarily incur 20% VAT on fitting a brand new kitchen, you will only pay 5% because of the conversion.
By reducing your refurbishment costs by 15% you can dramatically increase your return on investment (ROI) without cutting back on the quality of the work.
If you are buying a commercial building you will need to ensure that you are not charged VAT. If you are converting a commercial building into a residential home then you can ask the seller to complete a 1614D form, a process I’ve explained in this previous article, to remove the VAT costs.
Buy in a limited company to save tax
You will be able to offset 100% of the mortgage interest costs if the property is purchased in the limited company, which would not be the case if you purchased the property in your own name. By 2020 the maximum amount of tax to be paid is 17% in a limited company, which is less than the 20% basic rate tax band, 40% higher rate tax band and 45% additional rate tax band.
Practical steps you should now take to reduce tax, SDLT and VAT
It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step-by-step guide to implementing this strategy
- Identify an office to be converted into a residential property
- Buy the property in a limited company paying the commercial rate of SDLT
- Ensure you complete the necessary permitted development paperwork to convert from commercial to residential
- Ask the seller to complete the 1614D form if VAT is charged on the building
- Ensure that the principle contractor invoices you at 5% and they claim 20% VAT on the materials
- Make a profit and have 100% of the mortgage interest costs offset against the property income
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.
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If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.