Tax Benefits of Joint Ownership

By Carl Bayley BSc ACA

As property prices continue to rise, the barrier to entry for new investors is getting steadily higher. The solution for many is to join together with other investors and pool resources in order to achieve the 'critical mass' necessary to get started in the increasingly competitive UK property market.

But how exactly do you pool your resources together? Some form of 'Special Purpose Vehicle' (aka "SPV") is often the answer.

In this article, we will take a look at some of the legal and tax implications of a few of the more popular forms of 'SPV' currently in use.

Joint Ownership

The simplest way to invest in property with other investors is joint ownership. Whilst this is not really an 'SPV' as such, it is certainly worth us giving it some consideration here. In England and Wales, joint ownership can take the form of a 'joint tenancy' or a 'tenancy in common'. The key difference between the two is the fact that a 'tenant in common' owns, and consequently may sell, his or her own part interest separately, whereas 'joint tenants' jointly own one single and indivisible legal title in the property and can only sell it together.

Joint ownership in Scotland takes different legal forms. In practice, 'pro indivisio', the most common form of joint ownership for Scottish property, works much like a 'tenancy in common'. English or Welsh readers investing in Scotland should note that they will be subject to Scottish property law on any properties which they purchase North of the Border, regardless of where they reside themselves. (So make sure you get a Scottish lawyer!)

Another key feature of a 'joint tenancy' is the fact that, on death, a joint tenant's interest passes automatically to the other joint tenant or tenants. This severely restricts the joint tenant's ability to undergo any Inheritance Tax planning since the joint tenancy itself overrides the terms of a Will. (Although I understand that it may sometimes be possible for a deceased's beneficiaries to use a Deed of Variation to break the terms of a joint tenancy and allow the deceased's share to be passed on as part of their free estate. Like any Deed of Variation, this would need to be done within two years of the date of death.)

Where the joint owners are a couple or another combination of family members, the prospect of shares in the property portfolio passing by survivorship may still be acceptable despite the potential drawbacks for Inheritance Tax planning. In a more commercial situation, however, where the investors are more akin to business partners, 'joint tenancy' is unlikely to be suitable and it will generally make more sense to invest as 'tenants in common'.

Another practical drawback to joint ownership is the fact that, in England and Wales, legal ownership of a property title is restricted to a maximum of four people. Where five or more investors join together, this will create some practical difficulties. Whilst these difficulties are not insurmountable, things do begin to get a little messy and the legal fees will start to mount up.

One thing which many people overlook is the fact that the joint owners of property do not need to own it in equal shares. By using a 'tenancy in common' (or 'pro indivision' joint ownership in Scotland), any combination of interests totalling 100% is possible with the aid of a competent lawyer!

For Income Tax purposes, each joint owner is generally taxed on their own share of rental profits, regardless of the form which the joint ownership takes.

Joint owners who are not a legally married couple (or registered civil partnership) may, however, agree to share rental income in different proportions to their legal ownership of the property (perhaps because one of the investors is carrying out the management of the jointly held portfolio). The Income Tax treatment should follow the agreed profit sharing arrangements. It is wise to document your profit sharing agreement in order to avoid any dispute, however.

Legally married couples and registered civil partnerships are in a different situation. Their joint property income is deemed to be received equally - i.e. 50/50. They may, however, choose to follow the proportion given by their legal title in the property if they elect to do so before the beginning of the relevant tax year. Often, however, the 50/50 treatment provides opportunities for tax saving and will therefore be left in place.

For Capital Gains Tax purposes, each joint owner will always be taxed on his or her own beneficial share of the gain arising and any deemed 50/50 split or other agreement used for Income Tax purposes will be of no effect. Where any reliefs or exemptions are available, such as Principal Private Residence relief, for example, these are given on an individual basis and not by reference to the property as a whole.

Example

Hector and Miss Kitka jointly own a property which they bought together in April 2001. They sell it in April 2007, making a total gain of £120,000, or £60,000 each. The property was Hector's house (i.e. his Principal Private Residence) from April 2001 to April 2002. Since then, it has been rented out to various other tenants.

Hector is entitled to Principal Private Residence relief of £40,000 on the property (4 out of his 6 years of ownership are exempt - the last three years ownership of a Principal Private Residence are always exempt in addition to the actual period of residence). His remaining gain of £20,000 is covered by Private Letting relief, leaving him with no taxable gain.

Miss Kitka, however, has never resided in the property and therefore receives no Principal Private Residence relief and no Private Letting relief. She will be able to claim some taper relief and perhaps her annual exemption, but she will still have a sizeable taxable gain. The fact that the property was once Hector's Principal Private Residence is of no help to her whatsoever.

Partnerships

Moving on a step from joint ownership, the next structure to consider is a property investment partnership.

In many ways, the partnership simply combines joint ownership with the type of profit sharing agreement which we referred to above.

However, a partnership is considerably more flexible, as, subject to the terms of the partnership agreement, partners may join, leave or change their profit share at any time.

In Scotland, a partnership is a legal entity and may own property directly itself.

In England and Wales, however, a traditional style partnership is not a legal person and hence may not own legal title in property. This problem is generally circumvented through the use of nominees. Hence, between two and four of the partners will usually own the partnership's property as nominees for the partnership. For legal reasons, it is wise to ensure that there are at least two nominee interests - a single nominee could claim to own the property outright!

Since the year 2000, a new legal entity has been available throughout the UK - a Limited Liability Partnership, or 'LLP' for short. Like a Scottish partnership, an LLP is a legal person and may own property directly.

Each partner is taxed on his or her share of rental income and capital gains, as allocated according to the partnership agreement.

One major drawback to property investment partnerships, however, is the danger of incurring Stamp Duty Land Tax charges at frequent intervals. Since 22nd July 2004, Stamp Duty Land Tax has been payable whenever a partner:

1. Introduces property into a partnership,
2. Takes property out of a partnership, or
3. Reduces his profit share.

In the case of a reduction in profit share, there must be some consideration given for the transaction concerned (cold comfort, as there usually will be, even if only accounted for via the partners' capital accounts - which is enough to trigger the charge).

Example Part 1

Dave has been in a property investment partnership with four friends, Dozy, Beaky, Mick and Tich, for several years. The five friends each have a 20% profit share. Dave would now like to retire and wishes to leave the partnership. The partners agree that, by way of consideration for giving up his partnership share, Dave should take the property known as 'Dee Towers' with him. Dee Towers is worth £1,000,000.

Dave already had a 20% share in Dee Towers through the partnership so he is treated as acquiring an 80% share, worth £800,000, when he leaves the partnership. He will therefore face a Stamp Duty Land Tax charge of £32,000! (4% x £800,000)

Example Part 2

A short time later, Mick inherits £1,000,000 from his great aunt Shirley. He decides that he would like to invest this in the partnership. At the same time, Tich has decided that he would like to retire and wishes to sell his partnership share. Mick therefore buys Tich's 25% partnership share for £1,000,000, thus increasing his own share from 25% to 50%.

Immediately prior to Mick's new investment, the partnership had a property portfolio with a total gross value of £20,000,000 and borrowings of £16,000,000. Whilst the partnership's net assets are only £4,000,000, the Stamp Duty Land Tax charge is based on its property portfolio's gross value.

Mick has increased his profit share from 25% to 50%. He is therefore treated as having acquired a 25% interest in property worth £20,000,000. Hence, Mick will be faced with a Stamp Duty Land Tax bill of £200,000!

(This figure is arrived at as 25% of £20,000,000 charged at 4%.)

By and large, therefore, anyone using a property investment partnership should try to get their profit shares right in the first place and do their utmost to avoid changing them at a later stage.

Note: A straightforward cash investment into the partnership will not incur any Stamp Duty Land Tax charge. Hence, if Mick had simply put £1,000,000 into the partnership, rather than buying out Tich's share, he could have avoided the Stamp Duty Land Tax charge whilst still increasing his profit share to 40%. (40% x £5,000,000 = 50% x £4,000,000 = £1,000,000 already held plus £1,000,000 invested.)

(From July 2006, these charges do not apply to partnerships whose main activity is a trade other than that of dealing in or developing property. Sadly, this relaxation is of absolutely no use whatsoever to any property partnerships and the position remains as set out above.)

Companies

Another useful method for a number of people to invest together is to use a property investment company.

Using a company has a number of advantages, including the low Corporation Tax rates applying to profits (19% to 30%, depending on the size of the company).

Those same low tax rates apply to capital gains on property disposals too, although companies have far fewer reliefs available to reduce their taxable gains.

Subject to some anti-avoidance rules, the shares in a property investment company can change hands for a Stamp Duty charge of only 0.5%, which represents a considerable saving compared to the rather draconian 4% applying to property investment partnerships as we have already seen above. Furthermore, the charge on company shares would be based on the actual consideration paid for those shares and not on the gross value of the underlying properties.

Example Revisited

As above, Mick is investing £1,000,000 in a property investment business which owns a property portfolio with a gross value of £20,000,000 but has net assets of only £4,000,000. This time, however, he is purchasing shares in a property investment company. His Stamp Duty liability will therefore be only £5,000. (Compared with Stamp Duty Land Tax of £200,000 in the previous example.)

The lesson here is clear - if you and your colleagues are likely to want to change profit shares with any degree of frequency whatsoever, a company is likely to be much better than a partnership.

The main drawback to using a property investment company, however, is the additional tax which generally arises when the investors withdraw profits from the company, either by way of dividend or by winding the company up. The main point to note is that a company is usually of little benefit to the investor if all or most of its profits are being withdrawn in the early years of the investment.

Syndicates

The term 'syndicate' is a very loose one. When you join a property syndicate, you may, in fact, be investing through any one of a number of structures (or SPV's), including those which I have already outlined above, Unit Trusts (either UK or Offshore) or a much more loosely defined Joint Venture agreement.

The best that I can say is that you should find out exactly how your syndicate is structured and take your own independent legal and tax advice on it.

As with any other kind of investment, you need to be very careful who you trust with your money!

Carl Bayley is the author of several Tax Planning Guides including How To Avoid Property Tax, Using A Property Company To Save Tax and How To Avoid Inheritance Tax. Carl also frequently lectures on the subject of property taxation and has spoken on the subject on BBC radio and television.

Top 10 Tax Deductions

By Carl Bayley BSc ACA

Sometimes these days it seems like the World has gone 'Top Ten' crazy. Everywhere you look, there's a 'top ten this' and a 'top ten that'.

Not to be outdone, I present here my 'Top Ten Tax Deductions for Property Investors'. I must admit that there is no statistical basis for my chart rankings but this list is based on many years' experience of dealing with property businesses of all shapes and sizes:

1. Interest

   Whether your interest is tax deductible or not generally depends on the use to which the money is put. It does not, as many people seem to think, depend on which property the loan is secured on.

   If Robert borrows £25,000 by re-mortgaging his home and uses the money as a deposit on a buy-to-let flat he can claim the interest because it has been used for business purposes.

   And here's an interesting tax tip. If you intend to put your former home into your property letting business, consider re-mortgaging it before you do. The whole amount of any interest should be tax deductible.

   For example, let's say Robert's brother Vincent has a property worth £500,000 and an outstanding mortgage of £200,000. He remortgages the property and raises £250,000 which he uses to buy a new home.

   He now starts to rent out his £500,000 property. The entire interest payable on the whole of Vincent's £450,000 mortgage will be allowable as a tax deduction.

2. Repairs & Maintenance

   I could write pages about this so here's a quickie: Did you know that you can make provision for certain future costs, that you have not yet actually incurred, and still claim a tax deduction? The key requirement is that you are legally obliged to incur the expenditure.

   Let's say Kylie owns three flats in Hutchence Towers. In February 2007, she receives a statutory notice telling her and other owners to carry out roof repairs. On 4th April 2007 a quotation from a local builder is approved and Kylie's share of the cost is £3,000.

   Kylie can make a provision for her £3,000 share of the cost in her accounts for the year ended 5th April 2007, even though the work has not even started yet.

3. Motor Expenses

   The cost of running one or more vehicles used in your property business can be claimed as a business expense. Generally, the vehicle will have some private non-business use, so an appropriate proportion should be claimed.

   The appropriate proportion will vary from investor to investor but could be in the range 25% to 50%.

4. Office Costs

   Most investors do their admin at home and can therefore claim a proportion of their household bills.

   Generally, the proportion used is based on the number of rooms, excluding bathrooms and kitchens.

   Let's say Gerald runs his property business from a small room in his house. The house also contains a living room, a kitchen, a bathroom and two bedrooms.

   Gerald's house thus has four rooms which count for this calculation. He may therefore claim one quarter of his bills as a business expense. Expenses which can be claimed may include gas and electricity, council tax, general repairs and insurance.

5. Travel & Subsistence

   Travel costs incurred visiting your existing properties or scouting for new ones should be allowable. If your trip necessitates an overnight stay, you will also be able to claim accommodation costs and meals.

   These costs will only be allowable if your trip was purely for business purposes, and any private element of the trip must be merely incidental.

   For example, if you travel to Brighton to view some properties, the fact that you spend a spare hour sunbathing does not alter the fact that this was a business trip. Conversely, if you take the whole family to Brighton for a week and spend just one afternoon viewing properties, the whole trip will be private and not allowable for tax purposes.

6. Training & Research

   Many investors spend a lot of money on seminars, courses, books and magazines. The rule is that expenses incurred in updating or expanding existing areas of knowledge may be claimed but any costs relating to entirely new areas of knowledge are a personal capital expense.

   This can be a difficult distinction to draw. However, in most cases, property research expenses should be tax deductible.

7. Furnished Lettings

   Most landlords rent out their properties fully furnished. You can claim either:

   • The 'wear and tear allowance', or
   • Renewal and replacement expenditure

   There isn't enough space here to go into details, however most people are better off with the wear and tear allowance. This generally allows you to claim 10% of your rents as a tax deduction.

8. Legal & Professional Fees

   Fees incurred buying a property cannot be claimed against your income tax - they are generally only allowed as a capital gains tax deduction when you eventually sell your property. Costs incurred year in, year out in earning rental profits can be claimed, e.g. the cost of preparing leases, collecting debts and preparing your tax return.

9. Pre-Trading Expenditure

   You may incur some expenses for the purposes of your property business before you even start to let any properties out. Such expenses incurred within seven years before the commencement of your business may still be allowable if they would otherwise qualify under normal principles. In such cases, the expenses may be claimed as if they were incurred on the first day of the business.

10. Rental Losses

    All your UK property lettings are treated as a single UK property business. Hence, the loss on any one property is automatically set off against profits on others. Any overall loss cannot generally be set off against your other income but will be carried forward and set off against future UK rental profits. Losses arising on furnished holiday lettings may, however, be set off against other income and can sometimes lead to useful tax repayments.

Carl Bayley is the author of several Tax Planning Guides, including Bonus Versus Dividends, his guide to tax efficient company profit extraction, How to Avoid Property Tax and How to Avoid Inheritance Tax. Carl also frequently lectures on the subject of taxation and has spoken on BBC radio and television.

10 Top Tips for the Small Business Owner

By James Smith BSc ACA

Save on accountancy fees

The amount you pay in fees will depend upon the amount of time it takes to prepare your accounts. Delivering a large pile of receipts and invoices to your accountant will result in a very large bill. By taking time to do some basic bookkeeping you may be able to cut your bill in half, if not more. If you have neither the time nor the inclination to prepare basic records, think about using a bookkeeper during the year. This should work out a lot cheaper.

Track of your business mileage the easy way

Using the free route planning calculators on the RAC and AA websites, simply plug in your start and destination post codes and out pops an accurate mileage figure. You can even print out the document for proof to satisfy the tax inspectors. It certainly beats keeping a manual log in the car:

The AA Route Planning Calculator

The RAC Route Planning Calculator

Get your invoices paid quicker

Do you currently automatically offer 30 days credit, but normally get paid in 45 or 60 days? Did your customers negotiate these credit terms at the start of a contract, or did you just offer them by default? By cutting your due date to 14, 7 or even zero days you can make your payment seem more important and it also allows you to follow up debts while they are still fresh in the mind. In a service business this strategy can work particularly well. Also remember to include on your invoices all the relevant information, i.e. the due date for payment plus full payment details, including who to make cheques payable to, where to send them and your banking details for electronic payment.

Keeping it regular saves you tax

Keep on top of your accounting records by doing a little bit every week or month. This way you are likely to save money as well because you’ll be more likely to remember any costs you have paid privately that don’t appear in your business bank account and less likely to mislay your receipts. Remember that valid business expenses results in a lower tax bill.

How to find things on the HMRC website

HMRC’s website isn’t the easiest to navigate by any stretch of the imagination and the search facility is pretty ineffective. Fortunately many common documents will be the top search on general search engines such as Google UK. You can specifically search just HM RC’s website using Google by entering “site:hmrc.gov.uk” after your normal keywords.

Calling HM RC helplines

I have two tips to help you when phoning the taxman:

• If the line is constantly engaged, just keep hitting redial – often the queues are relatively short once you get a ringing tone.
• As the quality of help given can be very patchy and occasionally misleading, it’s often worth ringing twice to ensure you get given the same answer the second time.
  

Changes to self assessment deadlines

Don’t get caught out by changes to the self assessment system for the tax year ending April 5 th 2008. All paper returns will need to be sent in by the 31 st October 2008 and not January 2009 as is the current system. So if you normally start thinking about your tax return when the Christmas decorations come down you may have to start when you come back from your summer holiday, or alternatively file online next year.

Filing early will also come with an added incentive as HM RC will only be able to open an enquiry into your return within 12 months from the date of submission. Therefore from April 2008, the earlier you file, the earlier you will have certainty over your affairs.

Apply for the VAT Flat Rate Scheme

If you find VAT a pain in the neck, apply for the flat rate scheme which lets you pay over a flat percentage of your turnover every quarter rather than working out the VAT on every single receipt. You can often make significant VAT savings too if your business expenses don’t contain too much VAT. However, you could end up paying more VAT, so be careful to do the calculations for your own business. You can apply for the Flat Rate Scheme if your turnover is less than £150,000.

Significant cash flow advantages are available for both filing your VAT return online (you can pay up to 10 days later if paying by direct debit) and by using the cash accounting scheme which allows you to account for your VAT when you get paid, not when you send out your invoices. If your turnover is under £660,000 you can you this scheme qualify as long as you are consistent in its application.

Claiming back VAT on mileage

Many small businesses miss the opportunity to reclaim VAT on the petrol element of the 40p per mile mileage allowance. The published rates of fuel vary but a small business owner driving their own 2.2 litre vehicle for 10,000 business miles per year from January 2008 would be able to claim back £282. This is worked out using the VAT element of 19p (19/1.1.75 = 2.82p) multiplied by the number of miles (10,000). Not a bad saving for a quick bit of maths! For more information go to: Company Car Fuel Rates 2008

Top 10 Tax Tips for Foreign Property Owners

By Carl Bayley BSc ACA

1. Don’t Forget You Still Have UK Tax To Pay!

Arguably, this is more of a warning than a tip, but it is vital to remember that any UK resident individual buying property abroad is still exposed to UK tax on that property. This may include UK Income Tax on rental income, UK Capital Gains Tax on property sales and UK Inheritance Tax on any foreign properties you leave to your children.

The UK tax burden is often greater than any foreign tax liabilities, so it makes sense to undertake UK tax planning for your foreign property. Many of the same planning techniques that work well on UK property can be used equally on foreign property, although the overseas angle adds an extra dimension and brings both additional opportunities and additional pitfalls to be wary of.

2. Main Residence Relief for Foreign Holiday Homes

There is nothing in the UK tax legislation to say that a foreign holiday home cannot be a UK resident individual’s main residence for Capital Gains Tax purposes.

A holiday home can be treated as your main residence by making an election to that effect, generally within two years of buying the property.

The foreign property must be your own holiday home for at least part of the time but, by making the election, you will be able to exempt some or all of the capital gain on your foreign home from UK Capital Gains Tax.

Beware, however, that you’re only allowed one main residence and, if you’re married or in a civil partnership, you’re only allowed one between you, so electing to treat your holiday home as your main residence could backfire if you sell your main house back in the UK.

You can get the best of both worlds though, if you only elect to treat your foreign property as your main residence for a short period, say a week. How does this help? Well, since every main residence is also exempt for the last three years of ownership, that week buys you three years. In other words, you lose one week’s worth of exemption on your main house but gain three years (and a week) of exemption on your foreign holiday home.

3. Travel at the Treasury’s Expense

If you’re renting out foreign property, you have a foreign rental business. Like any other business, you’re entitled to claim tax relief for your business expenses. That includes any travel costs which you incur for business purposes.

Furthermore, all foreign property rentals are treated as one business. Hence, for example, you could claim the cost of going to Dubai to look for a possible new rental property against the rental income from a villa which you already have in Spain.

4. Understand the Local Taxes

Most countries will tax foreigners on any property they own in the country. Local taxes often apply to property purchases and sales and to rental income. Furthermore, you will often have to pay annual taxes on foreign property, even if you do not rent it out, and many countries also have gift and death taxes.

You will get double tax relief in the UK for any foreign tax on the same income or capital gains when the UK accepts that the foreign tax is broadly equivalent to the UK tax you are paying.

Beware, however, that every country has a different tax regime and not all of them are compatible with the UK tax system. If you suffer a foreign tax which is different in character to any UK tax, or which arises when no UK tax is due, you may not get any relief for it in the UK.

So, a foreign tax at 30% which is deductible from your UK tax liability on the same income may actually cost you less than a foreign tax at 10% for which no double tax relief is available. All these factors need to be considered before you invest in foreign property.

5. Do You Want Double Tax Relief?

As a general rule it is usually worth claiming double tax relief for any foreign taxes whenever you can. By claiming double tax relief, you deduct the amount of foreign tax paid from your UK tax liability.

However, you cannot get any repayment of foreign tax through a double tax relief claim and the best you can ever do is to reduce your UK tax liability to nil.

Sometimes, the foreign tax may actually exceed the amount of the taxable income or capital gain for UK tax purposes. In these situations, it is better to claim the foreign tax as an expense rather than to claim double tax relief.

Where you claim foreign tax as an expense, it reduces the amount of the taxable income or capital gain and can even create a loss. This loss can be carried forward to give you future tax relief and hence, in some situations, can actually give you better value for your foreign tax than a double tax relief claim.

6. Reduce Your Foreign Exchange Tax Risk

All UK tax calculations for individual taxpayers are carried out in pounds sterling. This creates some particular problems when it comes to capital gains on foreign property. You may make very little gain in the local currency, but when you translate your purchase and sale costs back into sterling, you may have a big Capital Gains Tax exposure in the UK.

Let’s say you buy a property in Utopia for 100,000 Utopian Dollars at a time when the exchange rate is two Utopian Dollars to the pound. That means you have a purchase cost of £50,000.

Later, you sell the property for 120,000 Utopian Dollars. In local terms, you have a modest gain of 20,000 Utopian Dollars. However, let us suppose that the exchange rate is now 1.2 Dollars to the pound. This means that your sale proceeds for UK Capital Gains Tax purposes are £100,000 and you have a taxable gain of £50,000.

Maybe that’s fair: after all, if you bring the money back to the UK, you will have made a profit of £50,000 on your investment.

Beware, however, that if you hang on to your Utopian Dollars, they will become a new chargeable asset for UK Capital Gains Tax purposes and may give rise to a capital gain or capital loss when you eventually spend them or exchange them into sterling or any other currency.

The real problem to watch is that if you make a capital loss on your foreign currency in a later UK tax year (year ended 5 th April), you will not be able to set that loss off against the earlier capital gain on your foreign property.

The tax tip here, therefore, is to make sure that you dispose of your foreign currency sale proceeds in the same UK tax year as you dispose of the foreign property itself.

7. Get VAT back with leaseback

In the UK, we are accustomed to the idea that any purchase of residential property is exempt from VAT. This is not the case in every country, however, and many European countries charge VAT, at rates of up to 20%, on new residential property purchases.

One way to recover the VAT on such a purchase is to enter into a ‘leaseback’ scheme. Under these schemes you, the owner, lease the property back to a hotel operator. This means that your property becomes a business property and you are able to recover the VAT. Typically, you are allowed a few weeks of personal use of the property each year and, eventually, after a suitable number of years, it is yours outright again.

The scheme only works for certain types of property, such as hotel rooms and apartments, and may carry disadvantages for other foreign taxes, such as higher Income Tax rates; so it’s one to investigate carefully before you sign up.

8. Borrow to Save

Many countries impose Wealth Tax, Inheritance Tax, or both, on foreigners owning property in their country.

Wealth Tax is usually an annual charge on the property owner’s net wealth in the country.

Foreign Inheritance Tax also usually applies only to a foreigner’s net assets in the country.

In most cases, you can reduce your net wealth in the foreign country for tax purposes by taking out a mortgage on your foreign property. In this way, it will usually be just your net equity in the property which attracts foreign tax.

If you don’t actually need a mortgage, you can invest the borrowed funds somewhere else outside the country where your property is located.

9. Avoid Evasion

When you buy property in a foreign country, you will usually also be acquiring tax obligations in that country. In fact, many countries require prospective foreign property purchasers to register themselves with the local tax authority before they can complete their purchase.

If you want to sleep at night, you need to make sure that you fulfil your local tax obligations in the country where your property is situated. Many foreign tax authorities have the power to seize property where taxes are unpaid.

Naturally enough, the local tax authority will write to you in their own language. Do not ignore this correspondence just because you don’t understand it: this is no defence. You will need local help and advice to make sure that you deal with the local tax authority appropriately and meet all of your obligations as a taxpayer in the country.

10. Expect the Unexpected

If the UK tax system is all Greek to you, or seems like Double Dutch, why should you expect foreign taxes to be any different? Every country has its own tax and legal system and, when you buy property abroad, you must abandon all of your preconceptions.

Assume nothing until you have investigated the local tax system thoroughly. Your destination country will have different taxes, different tax rates, a different tax year and a whole different set of rules, regulations, reliefs and exemptions.

Local property law and succession law is likely to be different too and a UK investor who overlooks this fact may suffer a great deal more than just tax!

Top 10 Mistakes for Non-Residents

By Lee Hadnum LLB ACA CTA

Leaving the UK can be very advantageous from a tax perspective and can significantly reduce or even completely eliminate your UK tax charge. We therefore thought it would be useful to look at some of the mistakes that are commonly made by people leaving the UK to avoid UK taxes. Have a read through these and make sure you don't fall into any of the traps!

1) Not establishing yourself as non resident from your departure

It sounds pretty obvious but unless you give up your UK residence you'll still be within the scope of UK taxes. In order to give up your UK residence status the best way is to move abroad permanently. This would entail selling or leasing (on a long lease if possible) your UK property, acquiring property overseas, transferring as many UK investments etc overseas and restricting UK visits. You should also ensure that you're non resident for at least three tax years. Other ways include going abroad under a full time contract of employment that will last at least a complete tax year or going abroad for a settled purpose.

2) Not paying enough attention to timing

Ideally you should wait until the tax year after you leave the UK before realising any gains or receiving significant income. This way you'd be outside the scope of UK taxes on most income. There's no point leaving the UK in September and then selling assets in December at a substantial gain. The UK Revenue would usually still look to tax the gain even though you left the UK before the disposal. In this case wait until the following 6 April to crystallise the gain. If you needed to delay the disposal you'd be looking at using conditional contracts or cross options to ensure the disposal date was after the beginning of the new tax year.

3) Not establishing non UK domicile status

If you're looking to avoid UK Inheritance taxes establishing non UK domicile status is crucial. A UK domiciliary is deemed to be domiciled in the UK for three years after leaving the UK, but after this date in these circumstances it is generally advisable to establish non UK domicile status as soon as possible. This would also help to protect the position if you needed to come back to the UK for any reason (eg medical care etc)

4) Spending too much time in the UK

If you spend either in excess of 183 days in the UK in any tax year or average over 90 days in the UK on average over four tax years you will be classed as UK resident. It's frequently this last time limit that is exceeded.

The recent Budget has confirmed that you’re classed as being in the UK if you’re here at midnight. So although the day of arrival will be classed as a day spent in the UK the day of your departure shouldn’t be.

The Revenue have also made it clear that in certain circumstances just abiding by the daily requirements on their own isn't sufficient to avoid being classed as UK resident. You would need to ensure that you followed point 1 above to make yourself non UK resident. If you still had the UK as your main 'home', even though you spent less than 90 days per tax year here you'd run the risk of still being classed as UK resident.

5) Not establishing treaty residence overseas

In order to safeguard your non residence position it's always a good idea to get yourself classed as treaty resident overseas. This of course assumes that the country you are planning to be a resident of has a tax treaty with the UK.

Most 'standard' tax treaties would include a provision along the lines of this (which is taken from the UK-Cyprus treaty):

'...(2) Where… an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules:

(a) He shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer.

(b) If the Contracting State with which his personal and economic relations are closer cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode.

(c) If he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national.

(d) If he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall determine the question by mutual agreement...'

Therefore, essentially, if you are classed as resident according to both the UK and overseas tax rules you should be looking to establish yourself as having a permanent home overseas.

6) Failing to adequately plan for the overseas tax regime

Essentially this is the 'out of the frying pan and into the fire' scenario. There's no point leaving the UK to avoid high rates of income tax, and moving to Spain for example which can have even higher rates of income tax (although the same rate of CGT). Therefore ensure you know exactly which UK taxes you are keen to avoid/minimise and research the overseas jurisdiction to ensure that you really can achieve that tax saving.

7) Assuming that all assets will be outside the scope of CGT when you're non resident

This is a common mistake. You leave the UK, become non UK resident/ordinarily resident and plan to sell your UK business free of UK tax. Unfortunately the CGT rules would still tax any gain arising from a UK branch or agency trade. Essentially this means that most UK sole trader or partnership businesses would still be within the scope of CGT even if you were non UK resident. A common way to get around this would be to incorporate the businesses and sell the shares. This would then not be classed as a gain from a UK branch or agency trade.

8) Using UK companies to establish businesses which retain profits within the UK tax net

Unlike the above, using a UK business can be disadvantageous in terms of ongoing profits. If you ran a business as a sole trader you could personally move overseas and providing the business was not carrying on a trade in the UK via a permanent establishment there should be no UK tax to pay. This means if you established residence in a zero tax haven eg Monaco or Andorra you could escape tax completely.

By contrast if you used a UK company you'd be subject to UK corporation tax even if you were non UK resident. You could extract cash from the company free of tax, but the actual profits of the company would be subject to UK tax.

Therefore if you're planning on becoming non UK resident you may want to think twice about using a UK company to run a non UK business (eg an internet trading business).

9) Not considering the National Insurance position

Most people moving abroad only think about the tax implications. However national insurance can also be important particularly where you go to work overseas.
As a general rule there is a requirement for an employer to pay Class 1 NIC's on salary for the first 52 weeks you are working abroad if it’s a short term posting. However this will depend on the country you’re working in, your employer having a place of business in the UK and you being UK ordinarily resident.

10) Not notifying the Revenue

This can be costly. You should let them know on a form P85 and also complete your self assessment returns on the basis of your non UK resident status (ie complete the residence supplementary pages). If you don't you won't be receiving your tax returns and unless you elect to file online you'll be racking up penalties for not filing returns. If you are non UK resident and have no UK taxable income you should write to the Revenue asking them to amend their self assessment records.

Increase Your Tax Deductible Interest

By Nick Braun PhD

With interest rates remaining stubbornly high, it’s essential to squeeze every drop of tax relief out of your borrowings. Here’s my short survival guide:

Pay off your Mortgage

If you have any savings use them to pay off the mortgage on your home. If you put £100 in a savings account and earn £5 interest you’ll be left with just £3 after the taxman has taken his slice. But if your mortgage interest rate is 6%, you will pay £6 per year on every £100 of debt.

In other words you pay twice as much interest as you earn on identical sums of money.

If your mortgage interest rate increases to 7%, any extra house repayments you make will be equivalent to earning 12% from a savings account. There isn’t an account alive that offers such a high guaranteed return!

Buy-to-let Mortgages

It’s better to pay off the mortgage on your home first because that interest is not tax deductible. Paying off a buy-to-let mortgage isn’t quite so attractive because the interest is tax deductible.

However, reducing your buy to let mortgages can be the best strategy if the interest rates are very high or having a lower loan to value ratio secures you a better deal when you refinance.

The fact interest is tax deductible may not matter much if you’re making rental losses anyway.

Is my Interest Tax Deductible?

Property investors are often unsure whether their interest is deductible. This depends on how the money is used. Use it to buy investment property and the interest is tax deductible. Use it for personal reasons and the interest is not deductible.

There is an exception to this rule: you can generally remortgage an investment property up to its original purchase price and the interest will be tax deductible, whatever you use the money for. For example, let’s say you bought a buy-to-let for £100,000 and the current mortgage is £60,000. You can borrow up to another £40,000 (if the bank will let you!) and all the interest will be tax deductible, no matter how you use it.

Using a Property Company to Save Tax

With rental income insufficient to pay borrowing costs, using a company is one way of getting the taxman to completely fund your rental losses.

For example, let’s say Gordon and Alistair each borrow £1 million and pay £80,000 interest. Gordon invests personally and earns a rental profit of £70,000 before interest. After deducting interest costs he’s left with a rental loss of £10,000 which he can only carry forward.

Alistair lends his borrowed funds to his property company and its properties also yield a rental profit of £70,000. Corporation tax at 22% comes to £15,400.

Meanwhile, Alistair personally claims interest relief for £80,000. This will produce a tax repayment of £32,000 (£80,000 x 40%). Alistair and his company receive an overall tax refund of £16,600 (£32,000 - £15,400).

Remarkably, this net refund actually exceeds the overall deficit of £10,000 on the company’s property portfolio. In other words, Alistair’s interest relief has turned an effective loss before tax of £10,000 into an effective profit after tax of £6,600 (£16,600 - £10,000).

The Government is therefore effectively funding Alistair’s property portfolio and adding a little extra too!

10 Ways to Beat the Credit Crunch

By Toby Hone

In the words of Paul Simon: “Times are hard!” So here are my top 10 tips for beating the credit crunch.

I’m not suggesting people make their own sandwiches, cut their own hair or walk to work. Instead the focus is on protecting your biggest asset – your home!

1. Understand your position. There is an old saying: “If you don’t know where you’re going, you’ll never get there’’. If you don’t know exactly how much your household expenses are, you won’t know where to focus. Once you have this information you can start actively reducing your biggest outgoings.

2. Mortgage mayhem. Mortgage interest is the biggest single cost for most households so it makes sense to target this expense. With inflation rising strongly interest rates are more likely to go up than down in the short term. You can protect against rate hikes by taking out a fixed-rate mortgage or even interest rate insurance.

3. Beware of mortgage arrangement fees . Mortgage arrangement fees have doubled in the past year. Although these can be added to your loan, they still have to be repaid and could add significantly to your overall mortgage costs. Arrangement fees can eat up your equity if you remortgage every couple of years. So don’t be fooled by mortgages with low interest rates and big arrangement fees.

4. Rent rather than sell. With house prices falling sharply it’s worth remembering that you only actually lose money if you sell. One option is to rent out your home and ride out the credit crunch. There has never been so much demand for rented accommodation in the UK. You may even end up with extra cash in your pocket if you downsize and rent or buy a smaller property yourself.

5. Use spare cash wisely. It’s usually better to pay off your mortgage than keep your money in a savings account. If you put £1,000 in a savings account and earn 5% interest you could be left with just 3% after the taxman has taken his slice. If instead you take that £1,000 and use it to reduce your mortgage you will save yourself, say, 6% interest. In other words, you save twice as much interest as you earn on identical sums of money! But make sure you can still get your hands on the money if you need it.

6. Improve your property. Instead of selling and buying a bigger home you may be better off improving you existing one. You’ll save on estate agent fees, legal fees and stamp duty. You may even be able to get extremely competitive quotes because many builders and other tradesmen are struggling to find work in the current climate.

7. Become a landlord. Consider renting out any spare rooms in your house. You can earn up to £4,250 per year tax free doing this. If you don’t like the thought of having complete strangers in your home, think about any friends or family you might like to live with.

8. Polish that credit score. Lenders are cherry picking customers more than ever. For this reason it’s essential to maintain a high credit score. Ways of doing this include: not missing any debt repayments, keeping loan applications to a minimum and, if you’re in danger of missing a loan payment, speaking to your lender!

9. Emergency measures. If you find yourself unable to cover short-term debt obligations, such as home loan repayments, there are still options available. In many instances you can qualify for payment holidays which can last up to 6 months and could help free up significant cash reserves. This is not a cheap option as missed payments increase future debt repayments, however it can help in emergencies. The measure of last resort will always be to maintain open and honest communication with your lender.

10. Find ways of making money. Believe it or not, there are still opportunities for homeowners and landlords to make money during the credit crunch. Whether this be improving their home or converting a large residential property into multiple residential units, there are still ways of adding value to property and in some cases making money in the current climate.