The problem – the tax on your investments before you start investing
As a higher rate taxpayer you will be paying a large sum of tax on your business (self employment)/employment income as HMRC taxes higher rate taxpayers 40% and additional rate taxpayers 45%. So to invest £30,000 into a property, you would have to earn £50,000 from your employment business.
- £50,000 income
- £20,000 tax (based on 40%)
- £30,000 left in your pocket to invest in property
People often talk about buying BMV properties, which stands for Below Market Value. The above scenario shows how you would need to earn £50,000 for a £30,000 investment. This surely means that you are buying above market value. Your return on investment will be significantly reduced by the above, in addition to the tax you will pay on the property’s profits.
Can you relate to the above?
Can you see that investing in residential property as a higher rate taxpayer is not as smart as you first thought?
If you are looking for capital growth from your property because your business/employment already provides the income you need, then you could invest in properties through a self-invested personal pension (SIPP). There are many advantages to buying properties in a SIPP:
- Tax relief on the pension investment you make into the SIPP
- Income generated in the pension is tax-free
- Capital growth in the pension is tax-free
- The 2015 budget announcement of caps on mortgage interest relief does not affect the pension investment
- You can consolidate your other pensions into a SIPP to invest in properties
- You control the pension investment
This does mean that you would no longer be investing in residential properties but you would invest instead in commercial properties. Given the HMRC attack on residential investors, isn’t it time you looked at the alternatives?
Clearly if you wish to have the income from property before you retire then the above will not work for you. There are some other strategies that you could use in this case, including:
Next steps to implement this SIPP strategy
This has been a very brief introduction to the benefits of SIPPs, but 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:
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.