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7 Proven Property Tax Strategies "Growing successful property portfolios and dramatically reducing your tax liability"

Strategy 1 - Property Partnerships A great way to boost your annual income and have an annual holiday courtesy of the taxman! When I started investing in property, the biggest mistake that I made was that I never considered buying a property in a partnership. YES - big mistake! This error was purely due to lack of knowledge and my belief that it would never have an impact on my tax situation. However, when I learned of the benefits of partnerships, you can bet your bottom dollar that I quickly changed my investments into joint ownership, just so I could really PAY LESS TAX! Please print off and file this tax strategy so that you can get easy access to it whenever you are off-line! ========================================= 'Partnerships - Simple, but very tax effective!' ========================================= One of the simplest and yet most effective property tax strategies is to buy a property with multiple owners in the form of a partnership. The number of partners is irrelevant, but the two most important considerations are that a) your partners must not be higher-rate taxpayers (by this I mean that they must not be taxed at 40%); b) they MUST be trustworthy. The latter point is so important that I am going to stress it again! ========================================= Partners MUST be trustworthy! =========================================

If you buy in a partnership, then you MUST make sure that the partners with whom you are purchasing are people that you implicitly trust, i.e., a spouse, your mother or father, etc. This is not just for tax reasons but is just simply good BUSINESS PRACTICE. As a golden rule, if you are a higher-rate taxpayer, i.e., YOU pay tax at 40%, then ALWAYS try to purchase with either a lower-rate taxpayer or, even better, with someone who pays no tax at all. ========================================= 'How are partnerships split?' ========================================= All property owned jointly between husband and wife is treated as an equal 50:50 split as default by the Inland Revenue. However, this is not the case for property owned between non-husband and wife. This is because the property ownership must be based on fact, e.g., Jo has funded 10% of the deposit, and Jack has funded 90% of the deposit. In this case the property would be treated as a 90:10 split in Jack's favour. ========================================= 'Do you have a non-income-generating partner?' ========================================= If your partner does not work, then the first 4,745 that your partner earns through property income will be exempt from tax! In addition, the next 2,020 will only be taxed at 10%. This means that if you pay tax at 40% but have a 50:50 split with your non-working partner, then on the basis of an equal profit of 6,765 from your property income, you will pay 2,504 less in tax on a yearly basis. This is achieved just by having the property in joint ownership! Even better, over a ten-year period, this would equate to a minimum tax savings of 25,040! BUT don't forget, the tax bands change every year, so your tax saving is likely to be greater than this!

Now, if you had a choice between paying the taxman 2,504 yearly or spending the same amount on a family holiday, which would you choose? ========================================= 'But what if my partner does generate income as well?' ========================================= As long as any of your partners pay tax at a lower rate than you, then to put it simply, there is a TAX SAVING to be had! So don't miss out! Case study: -----------John is a 40% taxpayer and his wife pays tax at 22%. Their employment income is 60,000 and 20,000, respectively. They also earn 5,000 each from their property investments. Therefore John pays 2,000 tax on his 5,000 property income, and his wife pays 1,100. They are saving 900 in taxes per year by not having the property solely in John's name! Again, over ten years, this equates to 9,000 in tax savings! ========================================= 'But what if I have already bought in my sole name?' ========================================= Don't worry, you won't be the first (I did it before you), and you certainly won't be the last! YES, ideally, if we knew there was a significant tax saving, then we would all purchase in a partnership from the outset. BUT we learn as life goes on, and that is exactly what this strategy is for - to help you to LEARN! It is VERY EASY to switch a mortgage into multiple ownership, but most people think it is a long and complicated process. Well, it isn't! It will cost in the region of 300-400 to have a property transferred into multiple ownership. But don't forget, this is NOTHING if you consider the potential tax saving you could make!

So, sacrifice a short-term cash outlay for a long-term tax saving! Here are the steps you will need to follow. 1. Contact your mortgage lender. Tell them why you want to transfer. They will then send you new mortgage forms form for you to complete in joint ownership. YES, that's right, in most cases you effectively have to apply for a new mortgage. Normally, the property will be put into joint names on the same terms as the original contract. However, if interest rates have reduced, then be CHEEKY and ask if you can also have it at the new reduced interest rate! My philosophy is, 'if you don't ask, you'll never know what the answer would have been!' 2. Contact a solicitor. Once your mortgage has been approved, your solicitor can have all relevant documents changed into joint names pretty quickly. It is as easy as that, and it can all be done in about one month! ========================================= 'Will a partnership BENEFIT me when we decide to sell the property?' ========================================= Absolutely, YES! Now, if you have a property in multiple names, then you will definitely make a tax saving. If for no other reason, then this is due to the fact that each owner will be able to use their own personal CGT allowance, which currently stands at 8,200 per person. So, this means that if husband and wife own an investment property jointly, then you can reduce any CGT tax liability by a minimum of 16,400, i.e., 2 * 8,200. There are also other interesting strategies that can be used

to reduce capital gains tax further, and these are covered in tax strategies THREE and SIX. So, make sure you watch out for them! ========================================= The next Tax Strategy - in three days' time! ========================================= You may be thinking, 'But what if I can't purchase in a partnership as I have no trustworthy partner?' OR 'Both my partner and I are higher-rate taxpayers, so how can we get a tax saving?' Well. if you are, then this is great as it means YOU ARE thinking about saving on property taxes! After all, not everyone has a partner with whom they can invest. Even if a partner is available, then they may well both be higher-rate taxpayers and therefore there is no income tax saving at all! Well, don't worry as the next tax saving strategy reveals how you can make 10,000 without paying a single penny in tax regardless of whether you buy in a partnership or as a sole trader! ========================================= Well, that's the end of this first Tax Strategy. I hope that this strategy has shown you how buying property in a partnership can be a simple and an EXTREMELY tax-effective way to buy a property. After all, it can save on both income and capital gains tax liabilities! If you now realise that you will save tax by having the property in multiple names, then start looking around yourself now to find those family members whom you know you can implicitly trust! Convert your solely owned property into multiple ownership now!

========================================== Strategy 2 - Using Property Management Companies to Slash Your Tax Bill! Set up your own property management company and save pounds in income tax! ========================================== I am now going to demonstrate another way to make an even greater tax saving, regardless of whether you buy properties in your sole name or as a partnership! Remember, one of the easiest ways of making money through property is to PAY LESS TAX! Just like the previous Property Tax Strategy, I recommend that you print off and file this strategy away so that you have easy access to it whenever you are off-line! ========================================== Ever wanted to have your OWN company? ========================================== I am sure you have! In fact, most entrepreneurs aspire to having their own company and one day being able to refer to themselves as being a 'company director.' But what better way than to be a director of your own company? Setting up a company to MANAGE your property portfolio can be an excellent strategy to make sure you pay less tax! So, let's take a look at exactly how it could possibly benefit YOU! ========================================== Are you a middle-band taxpayer? ========================================== Do you pay tax at the rate of 22% or less? The average income for a person in the UK is just under 22,000. So, in all fairness, most of us are middle-band taxpayers, i.e., we pay tax at 22%.

We all aspire to have higher incomes. But, unfortunately, along with a higher income usually comes more tax. What if you could have a higher income, yet pay no additional tax? Does this sound too good to be true? Well, it isn't! To put it simply, if you are a property investor who satisfies the following two conditions, then you will DEFINITELY pay less tax if you set up and run a property management company: a) your company makes less than 10,000 and retains the money in the company; b) your property gives you at least a 400 annual income before tax. The reason for the latter condition is that it can cost up to 400 to create a company and have the annual business accounts done, so you need to be making at least a profit of 400 from your properties. ========================================== How will a property management company save me tax? ========================================== TAX TIP - If a company makes an annual profit of less than 10,000, then the amount is exempt from corporation tax if it is retained within the company. Corporation tax is also referred to by some people as company tax. If less than 10,000 profit is made by the company and it is withdrawn by the way of a dividend, then corporation tax is paid at a rate of 19%. Sounds GREAT: Well, it is exactly that! Let me illustrate with the following case study. -----------------------------------------------Mr. Jones, a bachelor, is an employed car mechanic and has an annual income of 18,000.

He also has five residential investment properties from which he generates an annual profit of 9,000 per annum. On this profit he is liable to pay 1,980 in income tax on an annual basis. However, Mr. Jones knows that he can save on tax, so he sets up a Ltd. company with his mother. He also draws up a formal contract between the company and himself, where the company charges 750 per month for providing all lettings and management services for the properties; that is, his company acts as the letting agent. These services include ongoing maintenance, repairs, monthly property inspections, and all other aspects of tenant and property management. This means that over the year the 9,000 annual profit from his properties is paid directly into the company by the way of 12 equal instalments of 750. John decides to retain the money within the company and therefore is exempt from paying corporation tax on the 9,000. YES, THAT'S RIGHT - he pays NO company tax on 9,000. This means that over a ten-year period he could build up a very tidy 'nest egg' of 90,000. ========================================== 'Do I need to draw up a formal contract with my company?' ========================================== The answer to this question is YES. DO NOT set up a company and just start paying money into the company. The reason for this is because the Inland Revenue could challenge you (if you are ever investigated) for making artificial transactions to avoid paying tax. Just drawing up a simple contract outlining the services that your company is providing to you will help to prevent such a challenge!

========================================== Beware of artificial transactions! ========================================== Property tax specialist Arthur Weller advises that you need to be careful about trying to create artificial transactions that are aimed at avoiding tax. Don't think that you can do this if you just have a single property! The charges must be believable. What I mean here is that if you have a single property, then you can't pay 750 a month for property management-related charges. It is just not believable - especially if Mr. Taxman investigates you. Pay an amount into a company that IS believable and relates to the property. In fact, just charge what many letting agents do and have your own company charge you 15% of the rental income you receive. So, this means that for - A rental income of 400pcm you can pay your company 60pcm; - A rental income of 800pcm you can pay your company 120pcm; - A rental income of 1,200pcm you can pay your company 180pcm. ========================================== 'How do I go about setting up a company?' ========================================== This is easy. Your one-stop shop for setting up a company should be Here you will find out all you need to know about setting up a company, and it can be done within 24 hours. So, start thinking of a cool company name now!

Alternatively, get your accountant (if you have one) to set one up for you. It shouldn't cost you much more than 100. ========================================== ========================================== Well, that's the end of this SECOND Tax Strategy. I hope that this strategy has shown you how setting up a company can be a simple but EXTREMELY tax-effective way to DRAMATICALLY reduce or even wipe out any annual income tax liability. If this strategy will save you tax, then consider setting up a company ASAP, and start putting more money into YOUR pocket. ==========================================

Strategy 3 - Pay No Property Capital Gains Tax Maximise the 'private residence relief' to wipe out your property capital gains tax liability. ========================================== Don't forget: The main reason why we invest in property is to make SERIOUS money when we come to sell the property. After all, why should we have to move to the Middle East to benefit from tax-free income, when through some careful planning we could just as easily achieve it here, by investing in property! One of the easiest ways of making money through property is to pay less tax. And an even better way is to PAY NO TAX at all, by utilising legitimate tax-planning strategies! Just like the previous strategy, I recommend that you print off and file this strategy away so that you have easy access to it whenever you are off-line. So, let's get on with this next strategy! ==========================================

How much do you want to make from your investment? ========================================== The reason I ask you this question is because we have all thought about it before we purchased our properties. If you are a reserved investor who has invested in the cheaper two-bed terraced houses, then maybe you have thought about a 50,000 profit when you sell your property. Or, alternatively, if you are a more ambitious or adventurous investor, investing in an u- market area, then you might expect around 150,000. Either way, when you were thinking of your long-term profit targets, did you ever think about how much tax you might you have to pay when you eventually sell your property? I bet you never did! Well, consider the following. If at the time of selling your property you are a higher-rate taxpayer, then you can kiss goodbye to a maximum 20,000 of profit, or 60,000 if you are a more ambitious investor! OUCH! There went your Porsche or your luxury holiday! Over the past two or three years alone, such gains have been realised almost all over the country, yet most people have had to accept the huge tax liabilities. Well, there is no need to do this going forward, especially if you put this strategy firmly into your mind! If you follow either of the two strategies below and your investments give you your expected returns, then YOU WILL have a tax-free gain to do with as you please. ========================================== Make your investment property your HOME! ========================================== If you make your investment property your primary residence, then you will benefit from a whole raft of tax reliefs that can

ULTIMATELY absorb ALL your tax liabilities. There are two ways to achieve this. a) Live in the property before you let the property. This is what the really smart investors have been doing, especially those who want to just buy one or two investment properties and gradually grow a portfolio. This is an excellent tax strategy as you do not have to pay CAPITAL GAINS TAX on the last three years that you owned the property. This is regardless of how much the property price has increased during that period. To put it SIMPLY: If you bought a property, lived in it for two years, and then rented it out for the next three years, then you have a ZERO capital gains tax liability! This is regardless of how much money YOU made. All you have done here is legitimately exploited the 'private residence relief'! b) Let the property, and then live in it before you sell it! This strategy is, again, really for those people who are looking to grow relatively small portfolios over a period of time. Again, all you are doing here is exploiting the 'private residence relief' rule. The only difference is that you are living in the property after it has been let. Here are a couple of short case studies. Case Study (1) ------------------John, a higher-rate tax payer, buys a property in April 1999 for 90,000 and rents it out for two years before moving into it for one year. He then sells it after he has completed three years of ownership for 160,000.

Here there is no capital gains tax to pay as the last three years of ownership are exempt from tax! So, John has 70,000 to spend however he likes! Had he not lived in the property for a year, then he would have been subject to a maximum 28,000 in tax. OUCH! Case Study (2) ------------------Joanne buys a property in 1997 for 70,000. She lives in the property for three years, after which she meets her husband-to-be and moves in with him in 2000. She rents out her property for the next three years and then decides to sell it in 2003 for 150,000. Joanne has ZERO tax liability. This is because the three years that she lived in the property are exempt from tax as it was her 'main residence.' In addition to this exemption, the last three years that she rented out the property are ALSO exempt. This means that she has a WHOPPING 80,000 cash lump sum, to do with as she pleases! ========================================== That's not all - more CGT savings are available! ========================================== In this strategy I have only talked about one relief - the MOST POWERFUL 'private residence relief.' However, there are a whole raft of other reliefs that are available, which could be used to wipe out any other tax liabilities, even if you are not able to use the 'private residence relief'! After all, let's face it: If you are going to become a SERIOUS property player, then it won't be possible for you to live in each and every one of your properties. It just won't be possible!

It is still possible to wipe out any CGT liability by using any one or a combination of the following reliefs: - indexation relief; - private letting relief; - allowable losses; - personal CGT allowance; - taper relief; - plus more. ========================================== Track your capital gains tax liability! ========================================== Strategy 4 - Make Sure You Know When You CAN and When You CANNOT Offset Interest Charges Against Your Property Income ========================================== Each of the tax strategies provided have demonstrated how YOU can slash both your capital gains and income tax liabilities, just by following some simple strategies. However, one question that pops up time and time again is 'What types of 'interest' can be offset against my property income?' It is common knowledge that it is possible to offset 'interest' payments against property income. However, what the vast majority of investors don't understand is exactly what types of interest can and cannot be offset against property income. Well, don't worry as in this strategy I will explain and illustrate THREE different types of interest that you can offset. Remember: 'knowledge is power,' and the more you know about property tax, then the greater chance you have of reducing it. No doubt, most of you will be paying some or even all of these types of interest, so it means that you CAN start reducing your tax liabilities further! Just like the previous Property Tax Strategy, I

recommend that you print off and file this strategy away so that you have easy access to it whenever you are off-line! So, let's get on with learning what they are! ========================================== 1. Interest on mortgages ========================================== It is probably fair to say that this is the most common type of interest that is associated with property investors. This interest relates to the amount you pay back to your mortgage lender that is above and beyond the initial amount that you borrowed. It does not matter if the mortgage is a 'repayment' or an 'interest-only' mortgage. The fact that interest repayments have been made means that they can be offset. Let me illustrate this through the following case study. Case study (1): ----------------John buys an investment property for 100,000. The finance for the property is made up of a 20,000 deposit (provided from his personal savings) and an 80,000 buy-to-let mortgage, provided by the NatWest bank. In the first year of the mortgage he pays 2,500 in interest. This WHOLE amount can be offset against his income from the property. This means that if he received 5,500 income from his property, then he would only be liable to pay tax on only 3,000! ========================================== 2. Interest on personal loans ========================================== If you take out a personal loan that is used 'wholly and exclusively' for the purpose of the property, then the interest charged on this loan can also be offset. The important point to note here is that personal

loans MUST be used in connection with the property. Here are some examples when the interest charged on a personal loan CAN be offset against the property income. a) Loan used for providing deposit. Most buy-to-let mortgage lenders require you to provide a 20% deposit before they will lend you the remaining 80% in the form of a mortgage. If you don't have the 20% deposit readily available, then it is likely that you may well need to finance the deposit by getting a personal loan. If you do take out a personal loan for the 20% deposit, then the interest charged on this loan CAN be offset against the property income. If you are considering or have already done this, then what this means is that you have a 100%-financed investment property, where interest charged on both the mortgage and the personal loan can be offset against the rental income. b) Loan used for refurbishments/developments. Periodically, you will need to refurbish or even develop a property. Imagine that you have just purchased a property that needs total redecorating and modernising. If you take out a loan for carrying out this work, then the interest charged on the loan can be offset against the property income. Alternatively, you might decide to embark on a more expensive property extension, i.e., build a conservatory. Again, the same rule applies here - the interest charged on the loan can be offset. c) Loans used for purchasing products. If you purchase goods from retailers where finance is available, and these goods are used in your property, then again, the interest charged can be offset. This is more likely to happen if you are providing

a fully furnished property, i.e., a luxury apartment. If this is the case, then you may decide to buy the more expensive items on finance. Such items are likely to include - sofas, dining table & chairs, beds; - cooker, washing machine, fridge/freezer; - carpets, flooring, etc. If you are paying for these products over a period of time, e.g., 6, 12, or 18 months, then any interest charged can be offset. ========================================== OK, so you now know typical scenarios in which you can offset interest payments. Well, what about some scenarios in which you can't offset the interest payments? Good question! Here are some examples when the interest charged on a personal loan CANNOT be offset against the property income: a) loan used for paying for a family holiday; b) loan used for buying a new car; c) loan used for paying children's tuition fees, etc. It is clear from the above examples that all these scenarios have one common characteristic: *** They have ABSOLUTELY NOTHING to do with the property investment! *** So, suffice it to say that if the loan has nothing to do with your property investment, any interest repayments CANNOT be offset. My best advice on this is to keep things simple and always ask yourself, 'Is the loan being used for the sole purpose of my property?' If the answer is 'YES,' then you can offset the interest. If the answer is 'NO,' then you cannot offset the interest.

========================================== 3. Interest on remortgage ========================================== If you have a mortgage on your investment property, then it is highly likely that you will consider moving to another lender at some point. The main reason for this is likely to be because you are looking for a better mortgage deal. As interest rates have been falling over the past few years, more and more people have been remortgaging their investment properties to capitalise on the better deals and to help grow their property portfolios. Here are some pointers about remortgaging. a) If you remortgage your outstanding mortgage with another lender, then you can STILL offset the interest repayments. Case study 2: --------------Timothy has an outstanding mortgage balance of 50,000 on his investment property. He decides to move his mortgage from the NatWest to LloydsTSB as they are offering a lower rate of interest. Timothy can still offset the entire interest charged by LloydsTSB on the 50,000 remortgage. ---------------b) If you remortgage for a lower amount, then you can still offset the whole interest. Case Study: -------------This study begins similarly to the previous example, where Timothy has an outstanding balance of 50,000 on his investment mortgage. However, he inherits 20,000 from a family member. He decides to use this toward lowering his mortgage liability. Therefore he only remortages to the value of 30,000 with LloydsTSB. Again, the entire interest charged on the 30,000

can be offset against the property income. c) If you remortgage for a greater amount, then you can only offset the additional amount if it is used for the purpose of the investment property. As property prices have sharply risen over the past few years, investors have being remortgaging their properties for higher values. This is known as 'releasing equity.' If you have released equity or are considering doing this, then you need to follow the guidelines given above regarding the interest charged on personal loans. You need to ask yourself, 'Is the additional equity release being used for the sole purpose of my property?' Let me illustrate this through the following case study. Case study -------------Timothy has an outstanding balance of 50,000 on his investment mortgage. However, his property value has appreciated considerably, so he decides to remortgage with LloydsTSB for 80,000. This means that he is releasing additional equity out of his current property to the value of 30,000. He decides to use the equity release in the following way: - 20,000 is used to fund a new property investment, and it provides the deposit for his next buy-to-let investment; - 10,000 is used to pay for a new car for his wife. Now, Timothy can ONLY offset the interest charged on both the outstanding mortgage balance of 50,000 and on the 20,000 he is using as a deposit for his next purchase. This is because this combined amount of 70,000 is used 'wholly and exclusively' for his property investments.

However, he CANNOT use the interest charged on 10,000 for buying the car as this cost is not associated with his property investments. ------------Right at the outset of this strategy, I mentioned that 'knowledge is power.' Having read this strategy, you will now appreciate that the more you know about property tax, the more you can plan ahead and reduce it. Just as important is the fact that your tax education will help you from getting into unnecessary trouble should you be unlucky enough to be investigated. Strategy 5 - Will a Ltd. Company Improve YOUR Tax Position? ========================================== Some of the most burning tax questions property investors have are - 'Should I buy my property through a Ltd. company?' - 'Should I move my properties into a Ltd. company?' - 'If I own my properties in a Ltd. company, will I avoid paying property tax?' If you have not already asked these questions, then I am certain you will be doing so in the near future, especially if you intend to continue investing in property and growing your portfolio. To be honest, answering these questions is not straightforward (tax never is!), and the answers depend on your a) chosen investment strategy; b) personal and financial circumstances/ambitions; c) for how long you intend to hold the properties. However, before you even decide whether a Ltd. company will improve your tax position, there are some very basic rules/guidelines that must be understood. ========================================== Already a property investor? ==========================================

Do YOU already own investment properties? Are you already on the buy-to-let investment ladder? If the answer is YES and you are now wondering whether moving your properties into a Ltd. company is a good idea, then consider the following FACT: *** Properties must be transferred into a Ltd. company at market value! *** Yes, that's RIGHT! Moving properties into a company is treated in the same way as if you were selling the properties! What this means is that if you bought your investment property five years ago and you would now like to move it into a Ltd. company, then you are likely to have to pay an IMMEDIATE capital gains tax liability. This is purely due to the fact that property prices have significantly increased over the past few years! The exception to this rule is if the property is your principle private residence. Case study: -------------Alex bought five investment properties between 1992 and 1996. Their combined purchase value was 250,000. However, now they are worth a combined total of 550,000; that is, the combined value of his portfolio has more than doubled! By transferring the properties into a company, he may be hit with an immediate tax liability of up to 120,000 if he is a higher-rate taxpayer. OUCH! Hmmmm, it may not be a good idea to transfer them in this case! ========================================== Do YOU really know what 'limited liability' means? ========================================== I must admit, when Amer considered moving his portfolio into a Ltd. company, I asked him 'why do

YOU want to do it?' He gave me two reasons: a) to cut his tax liability (if it was possible); b) to limit his personal liability - here he was thinking of the worst case scenario, where if 'his whole world fell apart,' then he would escape from the banks and creditors! Now, I have already explained that moving properties into a company can instantly trigger a capital gains tax liability. Therefore he wasn't prepared to pay this tax liability NOW! To the latter point, I replied that 'Limited liability is a bit of a myth. Do you really think that a finance company will lend you huge amounts of money and limit YOUR liability in paying it back?' This got Amer thinking! And I responded further: 'They will want personal guarantees. After all, why should they take such a HUGE risk and let you get away with ZERO liability?' What this meant was that if Amer's whole world did fall apart, then he WOULD still be personally liable to pay everything back. This means that the creditors/baliffs would be knocking on his door pretty quickly to get it all back! Well, that quickly dismissed his second reason for wanting to move his portfolio into a Ltd. company! Suffice it to say that it just was not beneficial for him to do it! So, just let me clarify these two important factors again, and PLEASE read them AGAIN if you are considering moving properties into a Ltd. company. 1) If you have an existing portfolio (of any number of properties), then you will be liable to capital gains

tax if you want to move them into a company. ALSO 2) Your personal liability is never LIMITED in a Ltd. company. This is because your lender will WANT personal guarantees that you will pay back the money if things go wrong! ========================================== 'But what if I am thinking of buying my first property through a Ltd. company. Is it beneficial then?' ========================================== Good question! I will try and keep this simple. As a general rule, if you intend to reinvest the money you have made through your property investments, i.e., you want to continue reinvesting the profits into acquiring more properties, then it WILL be beneficial. There are three SIGNIFICANT tax benefits of growing a property portfolio through a company. These are explained below. a) The first 10,000 that a company makes can be exempt from company tax. You will not have to pay any company tax on profit that is equal to or below this threshold level if the money is retained within the company. b) Lower-rate tax savings. As a higher-rate taxpayer, you pay 40% on your profit and gains. For a limited company the tax rates are between 0% and 30% - a potential HUGE tax saving. c) It is possible to wind up your company in a tax -efficient manner. What this means is that if and when you decide to sell your company, you can do it in a way that could knock off tens or even hundreds of thousands of your tax bill. ========================================== 'So, what are the other BENEFITS of owning property

through a Ltd. company?' ========================================== Here are some more favourable benefits to consider when deciding whether to own your properties through a Ltd. company. - A company can define its own accounting period. However, it can not exceed 18 months. - You only pay stamp duty at 0.5% when purchasing company shares. - Indexation relief is still available for any capital gains. - Lower tax rates can be expected as companies pay tax between 0% and 30%. - The first 10,000 a company makes is tax-free. - Properties can be transferred within companies without incurring a tax liability. - You can grow a portfolio more quickly within a company by continuing to reinvest the profits and thus deferring any tax. - Dividends can be extracted from a company in a tax -efficient way. ========================================== 'So, what are the other DRAWBACKS of owning property through a Ltd. company?' ========================================== Here are some more drawbacks that you should consider before deciding to own your properties through a Ltd. company. - Companies cannot use the annual personal CGT allowance. This allowance is 7,900 for the tax year 2003-2004. This means that if you had a property in joint ownership, then you would lose out on a combined capital gains allowance of 15,800! - Official company accounts must be produced. The cost of drawing up such accounts can be 3-4 times more expensive than having your soletrader accounts drawn up. - Banks are less reluctant to lend money to you

if you are purchasing through a company. =========================================== Strategy 6 - Transferring & Gifting Properties to SLASH Your Tax Bill! Don't let YOUR death burden YOUR family with tax bills! =========================================== Hi Alan, As I mentioned at the end of the previous Tax Strategy - INHERITANCE TAX is FAST becoming a 'tax bombshell.' Unless YOU start planning for this tax NOW, you run the risk of leaving your loved ones with significant tax liabilities in the future. In this strategy I will outline some simple yet very effective methods you can use to limit the tax liabilities on both yourself and your loved ones. So, let's get on with this strategy and start to understand how you can tackle the issue of inheritance tax now! Just like the previous property tax strategy, I recommend that you print off and file this strategy away so that you have easy access to it whenever you are off-line! =========================================== What is inheritance tax (IHT)? =========================================== Inheritance tax is commonly referred to as both a 'gift tax' and also as a 'death tax.' If, during your lifetime, you 'gift' part or the whole of your estate, then the inheritor will be liable to pay inheritance tax. Similarly, if, at the time of your death, you pass on part or the whole of your estate, then again, the inheritor will be liable to pay inheritance tax. =========================================== Is there an IHT allowance? =========================================== YES - but it is not really that favourable, given the property price increases over the past few years. For the 2004-2005 tax year, the IHT threshold level is

263,000. Anything above this amount is taxed at 40%, i.e., at the highest rate. This means that if, at the time of death, your whole estate is valued at less than 255,000, then the inheritor will have no tax to pay. But, if it is over this amount, then anything above the 263,000 threshold level will be taxed at 40%. Case study: -------------At his time of death, John had an estate that was worth 240,000. His estate was made up by his house, which is worth 200,000, and he has 40,000 cash. He gifts his entire estate to his son. His son will have no IHT liability as it is below the threshold level. -------------Now, given the dramatic property price increases over the past few years, this threshold level seems to be VERY LOW. If parents living in London and the South East, in particular, were to pass away today, then it is highly likely that they would trigger an immediate tax liability on their loved ones. This is because a very large number of properties in these areas are already valued at above the threshold level! The average property price in the UK in 2020 is predicted to be in excess of 330,000. This means that more and more people are going to be subject to this tax liability in the future - especially if the 2004 budget is anything to go by as the threshold level only increased from 255,000 to 263,000! =========================================== One VERY important point to note! =========================================== a) If YOU die tomorrow and leave the estate to your children, then any IHT liability is due immediately by them.

Case study: -------------Death befalls both Albert and his wife. Their estate is valued at 355,000, which is gifted to their son. He must pay 40,000 in taxes before he can take ownership of the estate. -------------Now, in this above example, if the estate was made up entirely from the value of the property, in which the son lived, then it may well be a case of having to sell the property in order to pay the tax liability! Not ONLY is there a significant TAX burden but also a huge inconvenience for the son. =========================================== FOUR ways to reduce inheritance tax =========================================== Here are four common ways of reducing inheritance tax. a) Utilising the 263,000 threshold level. If circumstances are such that your estate is not worth more than the current threshold level, then as mentioned earlier, there is no tax liability for the inheritor. However, as we have seen earlier in this strategy, this scenario is becoming more and more unlikely! b) Gifting to a spouse. All gifts between husband and wife are exempt from tax, as long as they both live in the UK. This means that even if a husband has an estate valued at 10 million pounds, then he can gift this to his wife. It does not matter if it was gifted during his lifetime or at the time of his death; his wife will incur no tax liability. c) Gifting as soon as possible during your lifetime. During your lifetime it can be tax-beneficial to gift sooner rather than later, especially if you know who your estate is going to go to. There are two significant benefits of gifting during your lifetime.

i) The longer you live, the less tax your inheritors will have to pay. This is because there is a scaling taper relief that is available, which reduces the amount of tax that is liable. So, if you transfer a property or gift it away and survive for seven years, then the inheritor will have ZERO IHT liability. ii) You can use the IHT allowance again. If, after gifting, you survive for more than seven years, then you can use the IHT allowance AGAIN! This means that if you gift properties to the value of 125,000 each to your son and daughter and survive for seven years, then you can use the IHT allowance to gift up to 263,000 again! d) TRUSTS You have already learned that husband and wife incur no IHT liability when gifting to each other. However, if you want to gift to your children, then setting up a trust may be the best option. Trusts can be used to hold properties as well as other appreciating assets such as stocks and shares. Properties can be placed into trusts in a tax-efficient manner, which can help to significantly reduce and even avoid capital gains or inheritance tax. There are a number of different types of trusts that can be set up to make tax savings. Each has its own merits and is suitable for different scenarios. I strongly recommend that if you are considering transferring to your children or other members of your family, then you take tax advice from a TRUST expert. =========================================== DON'T forget YOUR capital gains liability! =========================================== Remember, if you decide to gift/transfer a property, then YOU are still liable to pay capital gains tax on any profit that YOU have made.

If you transfer/gift a property, it does not eliminate YOUR OWN tax liability. DON'T forget this important point! Timing of the transfer is CRUCIAL. If you are not careful, then when you gift/transfer, YOU could be hit with a CGT bill and your inheritor with an IHT bill!! OUCH - this is what I call a serious double tax whammy! ========================================== =========================================== Strategy 7 - 10% Wear and Tear or Renewals? Choosing the RIGHT method can save you tax! =========================================== In this final tax strategy I want to talk about two different methods you can use to cut your annual income tax bill. These two methods are known as - the 10% wear and tear rule; - the renewals basis method. They are relatively simple strategies to understand, and they both relate to the furnishings provided in a property. However, so many investors get confused by not knowing which method they can use and how it will affect their annual property income tax bill. Choosing the right one can have a significant bearing on your tax liability. So, let's get on with this strategy and start to learn more about both methods so that YOU can decide which one is best suited to your situation. Just like the previous property tax strategy, I recommend that you print off and file this strategy away so that you have easy access to it whenever you are off-line!

=========================================== 'What is the 10% wear and tear allowance?' =========================================== It is an allowance that the Inland Revenue has introduced to make the lives of property investors easier when they are completing their annual tax returns. In a nutshell, it allows you to offset 10% of your annual rental income against your property income tax bill. This sounds straightforward, and in principle, it is. However, there are some important points to note. a) If your rental income includes charges that would normally be borne by a tenant, then these have to be deducted before you calculate your allowance. You will understand this better in a case study that follows later. b) It does not matter how much YOU spend on furnishing your property. You can only offset 10% of your RENTAL INCOME. c) If you use this allowance, then it MUST be used for the duration of the property ownership (unless it becomes a partly furnished or unfurnished property). =========================================== 'When can the 10% wear and tear allowance be used?' =========================================== This allowance can ONLY be used for a FULLY FURNISHED property. It cannot be used for an unfurnished or even a partly furnished property. A fully furnished property is one that a tenant can start living out of as soon as they move in. In such a property, there will be no need for the tenant to go and buy any items such as furniture, electrical appliances, bedding, or even crockery. The only accessories that the tenant needs to provide

are his/her own personal belongings! ========================================== 10% wear and tear case studies ========================================== Here are a couple of case studies to illustrate the use of this rule. Case study 1: ---------------John rents out a fully furnished property. He receives a monthly rent of 500. The tenant is responsible for all property bills (e.g., utility bills) and services provided to the property (e.g., gardening). The annual income for the property is therefore 6,000. This means that John can offset 600 against his rental profits. Case study 2: ---------------This scenario begins similarly to above, but this time, John is charging 600. He charges an extra 100 because he pays the utility and gardening bills himself. The annual income is now therefore 7,200. John CANNOT offset 10% of 7,200 against his rental profits. He firstly has to deduct the costs that would normally be borne by the tenant. In this case, it is 100 per month. Therefore he can only claim 10% on 6,000 (7,200 - 1,200), which relates to 600. =========================================== 'What is the 'renewals basis' method?' =========================================== The renewals method allows you to offset the cost of 'renewing' or 'replacing' an item in a property. This replacement method can be used for a fully furnished property, an unfurnished property' or even a partly furnished property.

Unlike the 10% wear and tear allowance, there are no restrictions as to when this rule can be used. However, there are some important points of which you should be aware if you decide to use this method. a) You cannot offset the initial cost of an item! This is a VERY IMPORTANT point, which many landlords get caught out with. If you purchase a property and decide to fully furnish it with new or even second-hand items, then you CANNOT offset the cost of providing these furnishings. You can only offset the costs of these furnishings when you come to RENEW them! b) If you use this allowance, then it MUST be used for the duration of the property ownership. You cannot move to the 10% wear and tear allowance at a later date. ========================================== 'Renewals basis' case studies ========================================== Here are a couple of case studies to illustrate the use of this rule. Case study 3: ---------------Roy buys a new house and decides to let out his previous main residence (REMEMBER, this is an excellent capital gains tax saving strategy as per Tax Strategy 3). He leaves the existing furniture in his old house and decides to use the renewals basis. Two years later, he spends 4,000 renewing all the furniture in the property. This whole amount can be offset against his annual property income tax bill. Case study 4: ---------------Alex buys a brand-new luxury apartment in the city centre. He decides to spend 7,000 on 'kitting it out' with

the best furniture and appliances. Unfortunately, none of this can be offset against his property income tax bill because they are all 'initial costs'! ========================================== How to decide which method to use? ========================================== There are a number of factors you should consider before deciding whether to use the 'renewals basis' or the '10% wear and tear' allowance. These are outlined below. a) Furnished, unfurnished, or partly furnished? Remember, you can only use the 10% wear and tear rule for a fully furnished property! The 'renewals basis' can be used for an unfurnished, partly furnished, or even a fully furnished property. b) Consider the cost of fully furnishing a property! If you are buying a property and are going to let it out fully furnished, then you MUST consider the costs you are going to incur in initially furnishing it. If the cost is going to be high, as demonstrated in case study 4, then it may be better use the 10% wear and tear allowance. This is because of the following. - You will be providing high-quality furnishings and will not expect to replace them for a good few years, i.e., 5-7 years. Therefore you will have to wait this period of time before you can claim the 'renewals' basis. - If you decide to sell the property before you renew the furnishings, then by using the 'renewal basis,' you will not have managed to offset any renewals cost at all against your property. However, if you use the '10% wear and tear allowance,' then you can claim this from the

date you purchased the property. c) Consider how often you will need to replace the furnishings. If you believe that you will need to renew them on a regular basis, i.e., 2-3 years, then it may well be beneficial to use the 'renewals basis.' This may particularly be the case if you are providing accommodation to students. If you don't expect to replace it for at least 5 years, then the '10% wear and tear' rule may be more suited. d) Consider when you plan to sell. If you plan to sell the property quickly, i.e., in less than five years, then it is extremely unlikely that you will want to by new furniture. Again, you might be best suited to opt for the 10% wear and tear method. ==========================================