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):
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.
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.
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 are buying more than one dwelling in a single transaction, you will be eligible for multiple dwellings relief.
If you are buying the main residence of a deceased person from a personal representative of a deceased person and you are property trader, you may get full exemption from SDLT.
This is extremely important for some property flipping businesses as majority of their profits are eaten away by SDLT!
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:
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.