Residential Property Tax

Before you need to worry about paying taxes on your residential property, you need to find and buy your portfolio. One way to find possible properties is by advertising in local newspapers and make an offer to purchase in a resident to resident real estate deal. This can be favourable to some sellers as they will not have to pay estate agent’s fees, typically in the UK of 1.5-2% of the selling price, and you can offer to pay their solicitors fees as a sweetener in the deal.

Trying to do this type of deal on property or land estate agents will not allow you to meet with the owner or talk to them directly. I have found though that if you outline what you are trying to do and offer to make them a payment and then come back and buy more deals from them, they will work with you. Developing a trust is what is required!

For tax purposes in the UK, and to assist your accountant when he prepares your annual returns, you need to know what you can claim against your income and this can be summarised as follows:

- You need to record all of your expenses even if that incurs a loss on your income for that tax year. You may ask why this is done, but losses in one year can be accrued against profits in following years and recording and showing them to the Revenue keeps their inspectors happy.

- Carry out work to prevent deterioration on your property which might initially seem to be classified as capital expense, but HMRC (Her Majesty’s Revenue and Customs) will allow against your income if rent is being collected on the property when the work is undertaken.

- Claim the interest on your loan, or loans, up to the total value of the initial purchase price. If you remortgage above your initial total purchase price only the interest on the loan up to this value can be claimed. So a house bought for £100k plus initial costs of another £20k including purchase costs and refurbishment, but that has been remortgaged with a £150k loan can only claim the interest up to the £120k amount.

- “Like for like” replacement of worn or damaged items is fully allowed against your income tax, but upgrading to a higher standard is classed as capital expenditure. As an example, replacing a foam backed carpet with a similar product if fully allowed, but replacing with, say, a top grade Axminster weave would be seen as capital as it enhances the value of the property.

- You can also claim any expenses, such as transport costs, stationery, postage, etc as long as the expense is wholly and exclusively for use in or on the business.

In the example shown at the start of this article, the cost of the newspaper advertisement would be classed as an expense against tax, but the solicitor’s fees are retained in the overall buying cost and claimed back, when sold against Capital Gains Tax.

I have given you my best understanding of the way that the revenue looks at these costs and expenses, but I would recommend that you take professional advice from your accountant on these matters.

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