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Buying Tax Strategy

Having decided on your dealing/investing strategy and accepted the taxes you are likely to pay, you will now be ready to purchase your investment property. At this point, it is important to understand what tax allowances you will have for your chosen strategy. This will help you to formulate your tax buying strategy.

Understanding Income Tax

In the previous chapter, we became familiar with the tax liabilities of a property investor and a property dealer.

Always remember – that regardless of whether you are a property investor or a property dealer, you will be liable to pay Income Tax if your business makes a profit.

If your business does not make a profit then you are not liable to pay Income Tax. We will now quickly look at the Income Tax guidelines so you can understand what your potential liabilities will be.

The table below shows how Income Tax is calculated and the rates for the year 2006/2007:

Key Tip

The two golden rules for Income Tax are:
1. Make sure you use your tax free personal allowance
2. Minimise the amount of tax paid at the higher rate of 40%

Understanding CGT

CGT is liable whenever a gain of a capital nature is made when you sell your property.

You are only liable to pay it if you are a property investor and it is only paid when the property is sold. If you are a property dealer then you will not be liable to pay CGT, nor will you be able to make use of the CGT allowance.

Using your CGT allowance

The most notable allowance for CGT is that in the year 2006/2007 each individual has an annual tax exemption of £8,800. What this basically means is that if you are a property investor, and you sell your property, then the first £8,800 gain you make will be tax-free.

Once you have used your CGT allowance, you will be liable to pay CGT on any other capital gains.

The amount of CGT you are liable to pay is calculated by adding your remaining capital profit (after using your CGT allowance) to your annual income.

CGT for Individual subject to Income Tax

If you are employed and incur a capital gain when you dispose of your property, then your capital gain is added onto your salary to calculate the CGT liability.

The example below illustrates this:

Example: CGT Calculation

Mr Jo Jaffa has an annual income from paid earnings of £20,000. He buys a property and when he comes to sell it he has made a capital gain of £29,800 after deducting all purchase and selling expenses.

He uses his annual CGT allowance and this leaves him with a profit of £21,000.

This, when added to his annual salary, gives him a total annual income of £41,000.

On the £21,000 gain he pays 20% CGT on £18,335 as this is the maximum he can earn at the basic tax rate (i.e. £20,000 + £18,335 = £38,335 which is the maximum rate at which 20% tax can be applied).

He then pays 40% CGT on the remaining £2,665 gain.

Gain taxed at 20% - £18,335 x 20% = £3,667.

Gain taxed at 40% - £2,665 x 40% = £1,066

Therefore his CGT liability is £3,667 + £1,066 = £4,733

Please Note: He is not eligible to 10% on the first £2,020 because his earnings income of £20,000 is not less than or equal to his personal allowance of £5,035 so this rate has effectively been covered.

Example: CGT Calculation (1)

Mrs Jo Jaffa is a lady of leisure and has no income. She does have a piece of land that her husband bought and gifted to her some years ago.

The cost of the land was £6,000, but she is now able to sell it for £18,800.

She uses her annual CGT allowance of £8,800 and this leaves her with a gain of £4,000. She is liable to pay tax at 10% on the first £2,150 of the gain and 20% on the remaining £1,850. This means her total tax liability is calculated as follows:

Gain on £2,150 at 10% = £215

Gain on £1,850 at 20% = £370

Total liability £215 + £370= £585.

Sole Trader & Partnerships

It is likely that you will buy your first property either in your own name or in joint names with your partner. It is very common for people to buy their first property in their sole name, without even considering any other options that may be available. The main reasons for doing this are because:

• You are not aware of, or you misunderstand, the taxes you will be liable to pay once you have purchased your property.

• It is your first venture and you want to make sure that your chosen investment/dealing strategy works before you consider other aspects such as tax.

• You know of the tax liabilities but you do not have any intentions of paying them i.e. you believe that Mr Taxman will never find out.

As you can see, the reasons above are due to lack of knowledge, neglect or pure ignorance. Not addressing these issues is likely to result in you experiencing some nasty surprises later on i.e. Mr Taxman finds out you have not been paying your taxes! Therefore you must address these issues before you purchase your first property.

Sole Trader

A Sole Trader refers to an individual person who purchases a property in his/her own name.

You are more likely to purchase a property in your own name if you:

• Are a lower rate taxpayer

• Do not have a partner who you can invest with


• Do not want to invest with anybody else

The consequence of buying a property in your own name is that you will be solely responsible for all aspects and dealings of your property. This means that all outgoing costs and generated income will be attributed to you.

When to buy a property in a sole name

• If you are employed and pay tax at the higher rate but your partner is not employed, then the most tax efficient method is to buy the property in your partner’s sole name. If this strategy is used then he/she will be able to use the personal allowance before any Income Tax is paid at all.

• Similarly, if your child is at least 18 years of age and does not earn an income then you could buy the property in his/her sole name.

Key Tip

Only considering buying a property in another individual’s name if they are somebody who you trust implicitly. Don’t forget, the property is theirs as it is in their name!

More pages

Page 1:
Page 2: Sole Trader
Page 3: Don’t forget your children!
Page 4: Interest Only or Repayment Mortgage