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Thursday, October 07, 2010

'Gear up' & save tax

I was chatting to tax expert Steve Sims about various ways landlords can save paying tax on their buy-to-let properties.

He highlighted one aspect that many landlords may not of considered.  This technique is particularly useful for landlords who are earning considerable amounts of rental income and are also fortunate to receive a high personal income taking them into the top rate tax bracket.

To save money a landlord needs to 'gear up.'

This means borrowing money against their residential investment property and thereby instantly increasing the amount of expenses incurred on their rental property.

They then should invest in a tax free income generating investment.  When interest rates rise significantly they can then use their funds to repay their new outstanding buy-to-let mortgages.  What a landlord should ensure is that the buy-to-let mortgage they opt for has low set up fees and a competitive interest rate.

Low interest rates appear to be one of the lynch pins of the Coalitions economic policies meaning that many landlords will make considerable rental profits for several years to come.

Therefore landlords looking to minimise their tax burden should consider gearing up.  There will probably be financial costs with setting up the initial loans but this could be small compared to the potential tax savings.

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ER's blog said...

Please note the mistake in your sentence: "He highlighted one aspect that many landlords may NOT OF considered". It should be NOT HAVE.

Mark S said...

Any suggestions of tax-free income-generating investments? (Apart from ISAs, because I don't suppose it's really worth doing this for a few £k a year, and I suspect most landlords already max out their ISA contributions.)

The Editor said...

Hi Mark I go for venture capital trusts. These are considered to be high risk because they invest in early stage businesses. However, a few years ago analysts considered the banks to be a low risk investment. So what do they know? My preferences are for Baronsmead, Northern Ventures and Albion. It's possible to get these paying near a double digit yield and you pay no income or capital gains tax on the investment.

That's what I do but please do your own research before taking the plunge. It's a risky world out there & would hate to give you the wrong advice!

Anonymous said...

But how accessible are your funds once they are trapped inside the VCT?
Surely the ventures you are supporting need the funds to survive. I have heard that it's extremely difficult to get your money out once it's in - a bit like trying to sell on a timeshare!!!

The Editor said...

Hi anon, the funds are quoted on the stockmarket so you can buy and sell vcts as you would any other share. What you have to watch out for is the size of the spreads which can be large for the smaller funds. The spread being the difference between you buying and then you selling the share.

Anonymous said...

Thanks - it looks like I should investigate further. Maybe the problem with access has more to do with EIS than VCTs. Regards