Residential Property Investment For Higher Rate Taxpayers


Simon Misiewicz

28th February 2016

By Simon Misiewicz

Are you a higher rate taxpayer? Do you think about the fact that you have paid employment tax when you invest in residential properties?

The practicalities of property investments and tax

When I was a senior manager, and later when I moved into the world of consultancy, I regularly worked 60+ hours per week. Sometimes this involved staying abroad during the week and working weekends. I often had no time for my family, my friends or myself for that matter.

I had a time issue, something many of my property investment clients also grapple with. But for those with little time and a desire to invest in property, it’s important to note that there are different types of property investments, with different time demands. Below I have grouped them in order of the time commitment involved: from most time-intensive to least time-intensive, based on my personal experience.

  • Property developments (conversions & flips)
  • Houses of multiple occupancy
  • Single lets
  • Single lets with guaranteed letting agent

The last option refers to one where a letting agent or a property investor will pay you a guaranteed rent and then deal with all issues with the property/tenant, within reason.

As a higher rate taxpayer you may be looking for capital growth rather than a way to replace your income, as I am. This article has been written with you and me in mind.

With off plan property investments you will be incentivised by building companies to invest with a discount. You can then buy the property in a limited company, sell when it’s complete, and be taxed at 18% (2020 corporation tax rates). This money can then be reinvested.

The problem — financials and tax upfront

Many higher rate taxpayers work very hard for their earned income and are taxed at 40% or 45%. There are many people who take their remaining cash, after a large chunk of tax has been deducted, and invest in residential properties.

Let’s say John buys a property and aims to make money by renting it out. He buys a property below market value and feels that he can generate about a 15% return on investment (ROI). Here is the breakdown of his numbers:

£100,000 house
£25,000 deposit (25% of the purchase price)
£30,000 refurbishment costs
£55,000 cash invested in the project

He makes £750 rental profit per month, which equates to £9,000 year. To obtain the ROI we divide the £9,000 by the £55,000 amount invested, then times by 100.

£9,000/£55,000 X 100 = 16.3%

As you can imagine, John is very happy with these numbers.

But John is a higher rate taxpayer. In order to get the £55,000 to invest, he would have been employed and paid tax on this money. Let’s take for granted that the £55,000 was taxed at 40%. This means that John would need to earn £91,667 to end up with £55,000, which is therefore the actual cash invested.

The property profits will also be taxed at 40%. Thus:

£9,000 profit made in the year
£3,600 tax at 40%
£5,400 net profit after tax

The real ROI is therefore :

£5,400/£91,667 X 100 = 6% ROI (10% less than John had assumed)

This does not take into account the fact that George Osborne has also reduced the tax relief on mortgage interest to just 20%, which will mean that by 2020 John can only offset £500 in mortgage interest costs despite paying £1,000.

Would you invest in this property now that you have this additional information at hand? No? Neither would I.

Can you see how much tax you actually pay when investing in residential properties?

The solution — investing while paying less tax

There are a number of options available to higher rate taxpayers who feel, like I do, that property investment is still a good financial option for capital growth. I have written the below list in the order that I prioritise my investments.

Please note that this assumes that, like me, you are looking for capital growth first and income second.

  • Invest in a self-invested personal pension (SIPP), which attracts tax relief at the highest tax bracket. The SIPP may invest in commercial properties and its income and capital growth is tax-free.
  • Buy residential single let properties in a limited company and work with a letting agent/property investor that promises to deal with all tenant issues.

The type of commercial properties that we are investing in are:

  • Holiday lets
  • Serviced apartments
  • Offices

When buying residential properties, you should be buying properties that are likely to increase in value. While we are sadly unable to predict that all properties will increase in value due to macroeconomic factors, we can at least focus on looking for certain criteria that tend to indicate capital growth is likely, which are:

  • Properties that need TLC — properties that need upgrading because the previous owners did not maintain the property; good examples are old couples who have not done much to the property for a long period of time.
  • Upcoming areas — locations that you know are up and coming because of local authority development, social migration, school improvements, transport improvements, etc.
  • Development potential — houses that are on corner plots so can be extended, or where there is a precedent of bungalows having been converted into houses. This is not a strategy for time restricted individuals, but at least you could outsource the development to a contractor.

Next steps

If you want to understand how to implement these strategies 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.

Book a call to see how we can help you.