This knowledgebase article has been penned in collaboration with Justin Walton of Purple Bear Advisory. Purple Bear Advisory provides business and tax advisory services to businesses and business owners in the property sector.
Justin is a Chartered Tax Advisor, holding this qualification for the last 30 years. His experience includes advising on taxes at some of the largest accountancy firms in the World and at a FTSE 250 Infrastructure and Property business.
He now runs his own consultancy. Justin is experienced across enterprise-level business and property. He has translated this skill and experience to work in the property sector. From the smallest landlords to property investors of all sizes.
Justin brings his expert knowledge in areas like qualitative analysis, capital gains tax, and property tax structuring.
“We focus on doing the simple things well and are client-led based on their business and personal situations”
Justin is quite clear that he works with clients to ensure that they pay the right amount of tax. That means structuring appropriately, identifying and utilising available reliefs, and offsetting the correct expenses.
One area of note is the property tax relief available on some property purchases. This requires a blend of specialist tax knowledge and surveying to calculate the relief correctly. This relief could be between 10%-30% of the purchase price and is often overlooked.
The Two Types of Property Investor
Typically there are two types of investors, with different aspirations, expectations, and levels of skill and experience.
These are the individuals who are serious about property investment. They will often start with one property, but look to grow their property portfolio as a professional enterprise. They will be well prepared, well organised, and strategically minded. They will be more likely to use the pre and post-tax, total return approach to their property business.
Not only that, but their property portfolio will form a considered part of their overall investments and wealth. This would include their ISAs, pension, stocks and shares, and so on.
Their property portfolio will be well balanced and based on a long-term strategy. Intentional landlords are likely to invest in development and support for their business. They may have a sophisticated business model in place. This helps them to pay the right amount of tax and run their business efficiently.
Accidental landlords will most likely have inherited a property and decided to rent it out. They may have moved in with a partner and rented the second property. Or bought a property to rent without a clear long term strategy in place.
They probably have one or two properties, often without a clear business strategy. Accidental landlords are less likely to invest in advice and support. Some only really focus on this when something has gone wrong.
They may be unaware of some of the compliance and tax requirements that come with buy-to-let property. But they could set themselves up well for the future by taking advice and support earlier.
The 18 Year Property Cycle
The property market is a cyclical sector, cycling over an 18-year period. Working on this principle means that it is possible to scenario plan and run financial and tax sensitivities with some confidence. Take a look at the last 18 years. Property prices have almost doubled.
This means that income tax, corporation tax, and capital gains tax can be forecast to a reasonable degree of accuracy. Of course, unforeseen events can cause markets to fluctuate, and tax rates change. It’s important to understand that a forecast is just that- it’s not something set in stone, and can change.
“Focus on long term planning gives context to short term taxation, regulation, and economic changes. It means tactics can be employed to deliver the results you want”
Qualitative Analysis, business assets, and investment opportunity
One key area that investors often forget to consider is the total investment return net of tax. In other words, what hits your bank account after all costs.
There are two elements to total return.
- Rental Income
- Capital Return
Each of these should be considered on a gross (headline), net (after expenses), and net of tax (after taxes too) basis.
Successful property investors focus on the total return, which considers buy-to-let property over the long term. Strategic thinking in this way is more effective. It considers the total value to the business of one or many rental properties over a prolonged period. That period can take into account the 18-year property cycle, or several depending on the likely longevity of the business.
This approach considers the short-term value of a property in terms of rental yield. But it also considers the return on investment of property at sale.
FACT OF LIFE: we won’t always own what we own today. We might sell, or die.
Considering this simple fact of life, your property portfolio may pass to family members or your other chosen beneficiaries. The long-term implications of inheritance tax(IHT) and capital gains tax (CGT) could have an impact on your estate, if not planned for.
Qualitative analysis is a technique where we look at the long-term performance and liabilities of your property portfolio. It’s based on a quality approach, rather than the rather narrow short-term forecasting that only considers rental yield. Quantitative analysis can be done too to see the effect in numbers.
It’s a detailed, technical assessment of your property portfolio. It will help you plan for the future and helps you consider your income on a post-tax basis. This approach fits into Hawkhurst Invest’s Investor Starter Pack and looks at some key areas including:
- Planning for future property investment beyond a single property
- Buy to let mortgages, terms and conditions, and future-proofing ownership
- Total net of tax yield thinking and planning
We’ll look at the types of properties that could form a property portfolio. That includes buy-to-let, flips, refurbishments, holiday lets and serviced accommodation. Every person has a unique tax position and different properties or mixes of properties may suit different individuals.
“Property Portfolio Review ensures that portfolios are structured in the proper way”
At Hawkhurst Invest this approach is incorporated into the Portfolio Review pack designed for professional property investors.
Property investors can expect two key benefits from a qualitative analysis:
- Assurance. They can be assured that they are already doing the right things with tax, business structure, and forecasting
- Opportunity. We can demonstrate to investors different ways of achieving their goals to give them the outcomes that they want
“The key to successful property investment is to make sure that property portfolios are structured in the proper way”
In the short term, clients are provided the information that they need to ask intelligent questions when taxes change. It can also help investors who have reached a decision point. They may have had enough, or they want to leave a legacy for their children for example.
Key areas of support and top tips for Property Investment
- Do you have a sale in progress or about to sell? You may now be required to submit a tax return and pay the Capital Gains Tax within 60 days of completion of the sale. Get all your paperwork. You will be able to understand what your Capital Gains Tax liability will be so that you meet the deadline.
- Support for people living overseas who own property in the UK
- Support for people living in the UK who own property in the UK
- Are you in arrears on your tax bill? HMRC runs a Let Property Campaign. Their early disclosure program means that telling them that you are in arrears before HMRC discovers you will mean lower penalties.
This can have a big impact on your life. There is a process to go through and it does take some time from start to finish. So if you know or are unsure about your tax filings, it’s best to ask a professional for help now.
- Example 1: a client wanted to remortgage a property. They were unable to declare that all taxes had been paid up to date. This delayed the remortgaging so refinancing stalled while their tax affairs were brought up to date.
- Example 2: writing a will would be difficult. The client wouldn’t be able to report all of their income or fully understand their whole property situation.
- Support is provided to work through the HMRC Let Property Campaign to bring any tax arrears up to date. It’s far better to sort it out early than simply ignore any tax issues and hope they go away.
More accidental landlords face issues where they lack the business knowledge and support infrastructure to understand and deal with complex business and taxation issues.
- Mum and daughter investors, both with separate property portfolios. The daughter is the only child and likely the sole beneficiary of her mum’s estate.
- Mum’s estate could have had a significant inheritance tax and capital gains tax liability. Plans were put in place through the estate planning process to ensure that the right amount of tax would be paid.
- A strategic review of mum’s property portfolio led to a full understanding of costs and scenarios. It gave mum and daughter a series of options that gave them more choice than they thought they would have. Justin carried out the detailed tax analysis in the background. He presented his findings in a simple review that clearly showed them their options.
- The worst outcome would have been for mum to hold on to all her assets until she passed away. Knowing this was a great relief to mum and daughter.
This collaboration provides significant expertise as part of the network of skills and services for property investors. They can utilise this to develop their property portfolios and achieve their strategic and financial objectives.