1. Pay no CGT when you sell up
The Times claims that solicitors have been helping people avoid capital gains tax altogether by putting property into discretionary or life-interest trusts before it is sold. Apparently, the firms offering the plans have discussed them with HM Revenue & Customs to ensure they're valid.
It costs thousands of pounds to convert to a trust. The danger is that if lots of people attempt this, the Treasury is bound to tighten up the rules, which means the conversion costs are wasted and investors will be hit with unexpected tax bills.
2. A way out with REITs
Citywire says that property investors with large portfolios or sizeable unrealised gains may find it advantageous to convert to a REIT or to sell to an existing REIT when they're introduced in January 2007.
Two types of tax can be reduced. REITs which meet certain conditions are not subject to corporation tax. Also, the portfolio is rebased for capital gains tax purposes, so the taper relief is reset.
However, it can be impractical and expensive, as there is a 2% conversion tax, the REIT is required to list on a stock exchange, and it must comply with several onerous requirements.
3. Most people should buy as an individual, not a company
According to The Sunday Times, analysts believe it's only worthwhile buying as a company if you have at least 30 properties.
If you buy as an individual, you're liable for income tax on rental income, which could be as much as 40%. You pay capital gains tax, which could be as little as 24%.
Conversely, small companies pay just 19% corporation tax on their rental income. However, when money is taken out of the business as a dividend, higher rate taxpayers incur a further tax charge of 25%. If the properties are sold and the company wound down, capital gains tax is charged on the lot at a minimum of 24% assuming you've held on to the properties for ten years. So, you'd lose about 40% in tax.
4. Buy as an individual
This one, also featured in The Sunday Times, is quite well known but worth repeating. A husband and wife team should put the property in the name of the one with the lower tax band to reduce the income tax paid on rental income.
Before you sell, add the other name to the property so you can both use your capital gains tax personal allowances, currently 8,800 each.
5. Get an interest-only mortgage
The Times covered another familiar one recently. Your mortgage interest payments can be deducted from rental income for tax purposes. However, if you have a repayment mortgage, any capital payments can't be offset. This means you'll have to pay tax on a larger part of your income. that's why it can make a lot of sense to get an interest-only mortgage instead, where the total mortgage payment can offset income.
Therefore, if you have spare money put it into reducing the mortgage on your home, where there are no advantages to keeping a high debt.
For more information, Call Us on 01538 756 200
|
