Making More Money From Property
Continued – See previous blog for Tips 1 to 5
6. Design It Right
House buyers are often influenced by first impressions of things like nice décor and cleanliness. So it pays to focus on improvements that add value in the eyes of buyers, such as nice looking kitchen and bathroom fittings and tasteful lighting. It needn’t cost much to create a seductive atmosphere and a spacious feel. Smooth plastered wall and ceiling finishes usually go down well. And decorate mostly in neutral cream, off-white or plain white to offset restrained use of stronger colours or cool wallpapers.
7. Don’t cheat yourself
Before you start, it always pays to draw up a ‘proper’ budget. Be sure to include things like estate agents’ and solicitors’ fees, mortgage charges and surveyors’ reports. Most of these costs are linked to the value of the property. So on a typical sale you might expect to pay at least 1% + VAT estate agents’ fees, and typically from £ 500 or so for conveyancing charges.
For a purchase you could expect to pay double the cost of legal fees including searches and land registry charges, plus a similar sum for a survey. But the real killer, depending on the price of the property, is stamp duty.
8. Sole trader or a Limited Company?
Trading as a Limited Company has certain tax advantages. For a small firm, Corporation Tax is less than half the 40% tax on your profit as a ‘sole trader’ higher rate taxpayer. But because your company is a separate legal entity from you as an individual, you need to consider how to transfer funds out of the company and into your pocket, without incurring further tax as an individual. This is key to avoiding a higher overall tax bill than if the property had been held personally. Fortunately this can be done at a time when it is tax-efficient to do so, perhaps into your pension, or by making dividend payments which attract no National Insurance.
One benefit of trading as a limited company is that it’s easier to retain more of the profit to carry forward and use in the next development. The ‘limited liability’ status of a company can also work in your favour. For example, if you refurbish a property to let, and your tenant falls down the stairs and blames the accident on poor workmanship, the company would be liable for any legal claim, rather than you personally. On the other hand, if you are financing property acquisitions with mortgages, ownership through a company could affect your ability to raise loan finance.
Setting up a limited company is fairly straightforward, taking just a few minutes online and costing from only around £200.
9. Minimising VAT
Renovation of residential properties is subject to VAT at the full rate (unlike construction of new homes which is entirely free of VAT). There are however some important exemptions.
A reduced 5% VAT rate applies to the following works:-
* converting a non-residential building to residential use – for example a barn, office or warehouse conversion.
* converting a house into flats, or flats and bed-sits back into a single house (changing the number of ‘single household dwellings’ within a property)
* refurbishing a residential property that has been empty for 3 or more years. Renovation works to properties empty for over 10 years will be ‘zero rated’, so you can claim back the VAT paid if you are VAT registered.
* converting premises for a ‘relevant residential purpose’, such as an old people’s home.
This reduced rate of VAT only applies where each resulting dwelling can be sold separately (even if you only plan to rent them out). So extensions and ‘granny flats’ don’t count. Also, the 5% rate only applies to labour costs and not materials which are still charged at 20% – so there’s no benefit from doing it on a DIY basis.
10. Minimising Capital Gains Tax
From a tax point of view it’s important to determine whether you are renovating with the aim of selling at a profit, or renting it out. In other words, are you trading or investing ?
Sales of Buy-To-Let properties are subject to capital gains tax (CGT), whereas if you build or refurbish properties for sale this is normally classed as a ‘trading activity’ which is subject instead to income tax. CGT is generally considered preferable to income tax, due to the various tax reliefs you can claim to reduce the bill. But to qualify as ‘investment activity’ a property has to be let for the medium to long-term, rather than making short-term profits from sales.
CGT is charged on your net profit after deducting all costs (e.g. the original purchase price, construction costs and fees). To seriously shrink that nasty tax bill, it makes a big difference whether you have lived in the property for a while as your main residence – the longer the better, since profits from the sale of ‘main homes’ are exempt. The years you lived there will be exempt from CGT. The net taxable gain is then added to your main income and charged at your top rate of Income Tax.
Residential property normally counts as a ‘non-business asset’. However, if you can prove it is a ‘business asset’ (e.g. furnished holiday accommodation) the rates jump to a generous 75% relief after just 2 years of ownership. However there is no great CGT advantage by owning property through a compan
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