Failing to do proper tax planning
We all know the old saying about death and taxes being the only two certainties in life. There is no reason however that tax should be the death of your property investment business. One of the most common mistakes that new investors make is to neglect to do proper tax planning from the outset.
It is no exaggeration to say that this mistake has led to the untimely demise of many a budding property empire. So how can you minimize your exposure to HM Revenue while at the same time keeping everything legal and above board? Here are a few suggestions:
Get expert tax advice
Tax Law is a very complex and constantly changing area. Most of us are aware when bigger changes to the tax system occur but it takes a special kind of person to wade through, and make sense of, all the reams of tax related paper pumped out annually by various government ministries and agencies. These ‘special people’ are called tax experts and you absolutely need to go and see one before you begin your career as an investor.
Make sure that you claim tax relief as appropriate
Your buy to let business is exactly that: a business. This means that legitimate business expenses can be offset against your tax bill. Your tax adviser will help you with determining which expenses you should list but tax relief can probably, at the very least, be claimed for the following: mortgage interest, repairs, insurance, letting agency fees and advisory fees.
There are some types of taxes that perhaps do not concern you at the moment but that can seriously eat into your net worth in the future. Chief among these is Capital Gains Tax, a mechanism used by HM Revenue to claim a share of the profit on the sale of a property sale as tax. You should therefore carefully plan your exit strategy for when the day comes to sell your properties. There are various ways to minimize the potential impact of Capital Gains Tax but these can only be effective if they are carefully planned beforehand.
One of the very best ways to ensure that you do not pay too much tax is to ensure that your business is structured in exactly the right way. It may very well be that you will be better off by setting your business up as a Limited Company or a partnership. There is some very real tax advantages to doing this. Setting up a tailor made business structure may seem like very hard work but the long term benefits can be great. Make sure that you speak to your tax adviser and other experts about ways to optimally structure your business for tax efficiency and growth.
One of the easiest ways to pay bucket loads of tax is to simply do nothing and to do business like you have always done. Avoid this trap by doing everything in your power to ensure that you pay unto Caesar what is his, but not a penny more!