Buying a property in Auction – Don’t forget the tax

Whether you are a property flipper or a property developer or a BLT investor, don’t forget to consider the TAX while buying a property in auction. We are a firm of property tax specialists with in-depth expertise of all types of taxes that would affect auction buyers.

You should think about the tax from the time before you buy the property! Following summarises the top tax tips for the auction buyers:

Limited Company or Individual?

Before you buy a property in auction, first question you should ask – should I buy in a limited company or in my own name?

Answer as always in tax - it depends! The following main points will guide outline the general principles (although you need to seek professional tax advice before you reach conclusion):

Property Flipper

If you are buying to flip the properties, limited company is better structure in majority of cases. A Limited company will pay corporation tax at 19% (which is going down to 17% by 5 April 2020) on the profits. Whereas if you buy in your own name, you will pay income tax at 20% for basic rate tax payer, 40% for higher rate tax payer and 45% for additional tax rate payer. On top of that, as income from property flipping is treated as income from trading, you will also be liable for class 4 National insurance at the rate of 9% or 2% as applicable and class 2 National insurance at rate of £2.95 per week.

So, unless you are planning to withdraw all the profits from flipping immediately (rather than reinvesting in another deal), limited company is better structure in majority of cases.

Property Developer

As with property flippers, limited company is better structure for property developers as well compared to buying in your own name because of similar tax issues as with the property flipper.

BTL Investor

For BTL investor buying property in auction, the answer is not quite straight forward. This will depend upon your total income (rental income & other income), mortgage interest payable, drawings from the business and future plans. In a simplest case, if your total income (before deducting mortgage interest) will be less than basic rate tax limit (which is £50,000 from 6 April 2019), you should buy in your own name. Otherwise, limited company works better. This is just a generic conclusion – multiple factors such as potential inheritance tax, likelihood of increase in income in later years, funding considerations, etc will have impact on the tax planning.

SDLT – are you missing any reliefs and exemptions?

SDLT is one of the biggest tax most of the auction buyers pay – still I came across a lot of cases of over-paid SDLT on regular basis. There are multiple SDLT reliefs and exemptions available and most of the property buyers are missing these. Below are few examples:

  • Multiple Dwellings Relief
  • Buying Main Residence of Deceased person
  • Mixed Property

If you buy residential property mixed with commercial property, the whole transaction will be chargeable at non-residential rate instead of residential rate. This will bring huge SDLT savings in many auction purchases.

VAT – don’t miss out the big savings

I came across many property investors who think, they don’t need to consider VAT as there is no VAT on rent. Although this is correct in majority of cases, there are many cases where you are losing substantial VAT reliefs available. Few examples are below:

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    If you are hiring a contractor to carry out work in relation to changing the number of dwellings, you would be eligible for reduced rate of VAT (5% instead of 20%)! For example, if you are converting a three-bedroom house to two flats, the work would qualify for the reduced rate of VAT.
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    If you are converting single let property to HMO, the work would also qualify for reduced rate of VAT.
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    If you are constructing a new dwelling completely outside the current structure, the work would qualify as zero rate of VAT.

Corporation tax – don’t pay more than you should

Claiming deduction for all the allowable expenses is key for property investors. For example, any refurbishment expenses on the property you purchased in an auction can be either repairs and so allowable to be deducted from rental income or can be capital and so only allowable when selling the property. This needs to be reviewed by property accountant for correct claim.

Also, correct structuring of companies within the group may save you substantial amount of tax.

Income tax – timing & ownership structure is the key

Income tax is payable by individual investors in their rental income and profits from property flipping. Also, shareholders of a limited company will pay income tax on dividends. Correct tax planning of ownership and timing of sale or distribution is the key here in saving tax.