The bigger you scale as a landlord and property investor, the more efficient your tax dealings need to be. And the larger the property business, then potentially your tax bill could be, your most significant saving. Therefore, it increases the income you can keep.
As Benjamin Franklyn said, “in this world, nothing is certain except death and taxes”. Taxes are inevitable. If you think about it, they should be; it's what pays for the essentials that we all use, NHS and Education, and you have to pay your share. But exactly what should that be? Nobody likes paying more than they should. Is there anything you can do to minimise it?
Tax Avoidance: A Necessary Part Of Sound Financial Planning
Minimising the tax you are liable for is called tax avoidance and is part of sound financial planning, especially for businesses. Tax evasion is different. It’s a failure to pay taxes. Tax evasion is bad, and you’ll get prosecuted. Tax avoidance can be helpful, if it’s part of your future financial planning.
If sound financial planning sounds complicated, who can help? Your accountant, of course.
Accountants are the experts. They have knowledge which could help you avoid common mistakes. The key is involving your accountant in the discussions for the future - that way, they can advise you appropriately on how to realise that plan whilst reducing your tax bill. This makes good sense.
Tip: It's harder to do financial planning retrospectively, you should consider it BEFORE buying the next property.
Should I Buy My Property In My Own Name Or My Company's?
If you are buying a property, should you buy it in your own name or your company’s? The answer depends on your needs and when you want an income from it. You need to have planned it out.
With property held in your own name, you may have to pay self-assessment tax bands of up to 50%, AND you can’t control when you earn it; it just gets taxed. However, if you have bought the property in a limited company, the company will have to pay a corporation tax starting at 19% if the money is left there. No more tax is due until your need the money. Which is best?
If you have to spend £300k to get a property, and you are then earning another £12,000 per annum. Having that income come from the right place can mean you keep more of it. We like the sound of that.
As you progress through your property journey, getting bigger and scaling, inevitably, your tax dealings have to become more efficient as well. This is where specialist help is invaluable, well essential actually.
The UK Tax System (The Tax Bible) Is Roughly 10,000,000 Words With 21,000 Pages
Here are some statistics for you, the UK Tax System (the tax bible) is roughly 10,000,000 words with 21,000 pages. The complete works of Shakespeare are only 880,000 words, and the Bible is about 800,000 words. In 2015, the Hong Kong Tax System, which was seen as the most efficient in the world, was 276 pages long. In other words, the rules surrounding our tax system are vast and change frequently. Keeping track of all these changes is hard.
So having some financial planning thoughts like “when will I need this income”, “how will I pay tax on this money”; “will this purchase help or hinder my tax payments this year” is essential. Talking through all possibilities with a specialist can ease your stress! So don’t rely on the “bloke down the pub” or your own scant research on the internet.
How To Plan For Your Tax Bill
Another aspect of planning for your tax bill - because we know there will be one eventually - is saving for it. Paying taxes should not be a surprise. As Benjamin said, it comes to all of us, so plan for it. Not everything that comes into your bank account can be spent - tax has to be paid, so save for it. How much depends on the planning you do, but save.
Part of being able to save for the tax bill is having your accounts done early - then you know exactly how much you are saving! Don’t wait till the last minute to get your accounts or self-assessment done; it's a good habit for planning.
Hopefully, that future involves scaling your business. Did you know that the bigger you become, the more efficient your tax dealings and the more significant savings can be made? For example, a landlord who would pay tax in the 50% income tax bracket can keep a lot more of their money, if their tax planning is good enough. Potentially bringing them down to paying only 20% tax. Or less. It's possible, depending on your circumstances and your tax planning!
With a highly complex tax system, there are multiple taxes to pay, but here is the good news, there are also multiple ways to plan around them. It's this that specialist accountants can help with. Some that could be paid include income tax, corporation tax, national insurance, enveloped dwellings, VAT, Capital Gains, stamp duty land tax (SDLT) etc. That’s also without going into any more specifics or reliefs available, there are many reliefs in SDLT and also in tour operators' margin scheme (TOMS). Do you understand all of them?
Having an accountant involved in the discussions about the future of your life and business is the only way to ensure you reduce your tax bill. When they understand what you are trying to achieve for the future, they can advise on the right way to buy assets, take income, and save for the future. But not all accountants are the same.
Think of your GP - they are generalists, and they can help with most things. But you wouldn’t want your GP doing open heart surgery on you - they are just not specialised in that area. You would want an open heart surgeon trained for years and understanding all the latest developments. It's the same with accountants. Some are just generalists and can help most businesses, particularly start-ups. But you need a specialist for property - one who is big enough to keep up to date with the ever-changing, complicated tax system but also one who is small enough to care about your future and want to help you achieve it.
One last tip - getting HMRC Investigation Insurance from your accountant is advisable. The insurance will cover the cost if HMRC decides to investigate your business. It can be costly to fight an investigation by HMRC! So remember to ask your accountant for it.