Investing In Property Tax Efficiently

The Probe - June 2007

Investing into property can be tax efficient and be very profitable, as well as having the additional benefit of allowing you to spread the risk within your portfolio.

Over the last few years, property owners have benefited from the dramatic increase in the value of their properties. With what appears to be every man and his dog now owning a number of properties in their portfolio, I felt that this month we should look at a couple of options to consider.

Option 1

Buy a two-bedroom house for say £125,000. If there are two down stairs living rooms convert one to another bedroom and depending where in the UK you buy, the rental income should be approximately £750.00 per month based on renting to three young professionals or students.

Your deposit (around 15% of purchase price), legal fees and furnishing the property should cost approximately £25,000. After deducting interest payments (£4,800), annual net profit is £4,200, a yield of 16.8%.

Option 2

If you prefer less hassle, there are companies specialising in doing all the leg work for you, where you can buy a property for around £25-50,000, including brokers fees and refurbishment - these are typically properties in less desirable or economically depressed areas. The broker will also introduce you to local management agents who will market the property, find tenants and arrange for any necessary development work to be completed if required.

Don't be deterred that typical tenants are likely to be DSS claimants. You can rest assured that the rent of approx £60.00 per week will always be paid! So the annual rental yield will be 12-17%.

Watch out for various other costs such as landlord’s insurance, gas and electricity safety certificates, property maintenance costs, and periods where the property may not be let. Also bear in mind new changes for landlords that should also be considered.

Tax Advantages of investing into Property

• If you have a partner purchase the property jointly. If you make a capital gain when you sell the property you each have a capital gains allowance of £8,800 per annum in the 2006/7 tax year, which potentially reduces tax liability by £3,520 for higher rate tax payers.
• Purchase the property below £125,000, (or £150,000 in certain disadvantaged areas), to avoid 1% Stamp Duty being paid.
• Mortgage interest on a Buy To Let is classed as a business expense and attracts tax relief at your highest rate. So if the interest is £500.00 per month, the net cost is only £300.00!

So investing into property can spread your overall portfolio risk, reduces your tax liability, delivers regular income and provides a nice profit if the property increases in value!