Taxman benefits from buy to let revenues

The increase in buy to let has been well documented in recent years. With falling interest rates and volatile stock markets, investors have been looking for a relatively save haven for their capital. The buy to let market has grown significantly and an unexpected beneficiary has been HM Revenue & Customs.

The Daily Telegraph reports that the taxman is cashing in with related tax revenues of £2bn per annum.  The buy to let tax take is up 13% year on year and the number of property investors is a staggering 1.9m.

There is a downside to this windfall for the taxman. The popularity of buy to let has prompted HMRC to clamp down on the sector. A special tax force has been set up to tackle property tax cheats. Top 20 accounting firm Hacker & Young predict HMRC will become 'far more aggressive in pursuing undeclared rents and disposals'.

Taxpayers who calculate their tax due accurately under the 'self assessment' regime and file their tax returns in good time have nothing to worry about. Those who have dealt with their own tax affairs to date may want to think about engaging a professional advisor to help ensure their computations are accurate and they are claiming all relevant allowances and reliefs. With property disposals in particular there can be some complexity in the computations and an advisor can help ensure that only the right amount of tax is paid.

In our own accountancy practice where we deal predominantly with business accounts and tax work we have seen a significant increase in the amount of buy to let work we do for clients. There is some comfort for people who have been slow to deal with their buy to let tax administration. We have worked successfully with several clients who were several years behind with their tax returns. Working closely with HMRC we have brought the clients' tax affairs up to date and achieved positive outcomes for the taxpayers.

www.base52.co.uk 

Buy to let - getting started

The popularity of buy to let investment is increasing. With very low interest rates people are looking for higher and relatively safe returns elsewhere and buy to let can seem attractive. There are pitfalls such as unforeseen repair bills, bad tenants, void periods and so on. These can be managed however and a regular income stream and the prospect of capital appreciation can make the investment worth the effort.

This blog is about helping you to get started by deciding on your strategy and the right structure.

So how do you go about finding a successful buy to let investment? Well the starting point is research. What properties let most easily? Where are the best returns? A good place to ask these questions is at your local letting agent. Often they will be more than willing to help as they see you as a potential customer. Some agents are even prepared to attend a viewing with you to give their advice on the suitability to let and what the rental might be.

When you have completed your research you can start to formulate your strategy. Will you be focussing on one or two bed flats, terraces or semis? Who are your typical tenants? What location will you invest in? Your strategy will be underpinned by numbers. This will show what returns you need to achieve over a period of time. You might set a long term goal of building up a portfolio of 4 or 5 properties and then work towards this in stages. Alternatively your ambitions might be more modest and one property may be all you want to invest in.

Another key decision after you have decided on your strategy is what structure you will use to invest in your first property. Will you invest as an individual, as a ‘partnership’ with other individuals or as a limited company?

Investing as an individual or shared ownership with other individuals is the simplest option administratively. There are other benefits too. The income on rental is free of national insurance. You are taxed at your ‘marginal’ rate of 20%, 40% or 50% depending on your other income. If your only income is from rental and your total rental income is below the personal allowance threshold (currently £9,440), your income will be tax free. Each person has a capital gains annual exemption of £10,900. This means that the first £10,900 of any gain on the sale of a property would be tax free.

If investing as a couple it makes sense to make use of the personal tax allowance and lower tax bands. So if one member of a couple is a relatively low earner it might be best to invest in the property in their name only (subject to mortgage considerations) to maximise tax relief.

There are usually higher administration costs in running a company. Another disadvantage there is often an additional tax charge when shareholders wish to extract any proceeds from the company. 

There are some advantages in using a company however if the following circumstances apply:

• You will be increasing your investment in residential property
• You are unlikely to be selling the properties on a piecemeal basis
• You are mainly financing the initial purchases from your own capital

If so, use of the company as a ‘tax shelter’ for the net rental income can be attractive. Corporation tax rates are relatively low so surpluses can be left to accumulate in the company to help fund the property portfolio. There are two long term advantages of the corporate route for residential property. Firstly it can be used to build a ‘retirement pot’. Over a period of time the financing can be paid off leaving a strong income stream to fund retirement. Secondly, if shares in the company are sold rather than the properties, this can be attractive to buyers due to the lower stamp duty rates on share sales.

In conclusion, for most investors, investing as an individual or through shared ownership is the simplest and best option. For serious long term investors or those looking to build a retirement fund, a company can be a sensible option. It would be a good idea to speak to an advisor in advance of investing to help you weigh up the pros and cons.

www.Base52.co.uk

Changing from a sole trader to a limited company

There are advantages for some businesses in operating as a sole trader. The main benefit is that it is simple to set up and administer. There is a requirement to notify HM Revenue & Customs within 3 months of commencing trade. In terms of administration ‘Class 2’ National Insurance will need to be paid monthly or quarterly and a self assessment tax return will need to be submitted every year. Many sole traders deal with their own record keeping and enlist the help of an accountant to compile year end accounts, deal with the tax calculations and file the tax return. Accountancy costs are therefore relatively low. So simplicity and low administration costs are the main benefits.

Once a business reaches a certain scale there can be a case for changing the status of the business to a limited company. An advantage of a limited company is that the shareholders are only liable for the value of their shareholding (which may just be a nominal sum) if the business gets into financial difficulty. Sole traders are personally liable for any debts the business incurs. There can also be greater credibility from operating as a limited company and under current UK tax rules there can often be savings from trading via limited company in comparison to being taxed as a sole trader.

A sole trader is taxed on the profits of the business. There is no separation between the business and the individual so in a good year personal taxation will be high and the converse in a bad year. The company is a separate entity from its shareholders and is taxed on its profits. Company tax rates in the UK are relatively low at 20% for the smallest companies. Shareholders and directors (who are often the same people) are then taxed on the income they draw from the company as dividend or salary. As there is flexibility on how much and in what mix this income is drawn, it is often possible to keep personal tax levels low.

An analysis by a firm of chartered accountants looked at typical net tax savings from operating as a limited company in comparison to a sole trader. For profits of £50,000 per annum, potential tax savings are in the region of £4,000 per annum. Tax rules can change of course so trading a company solely for tax reasons is probably not a good idea. The administration costs of a company are higher than for a sole trade business. Company accounts need to follow stricter guidelines and typically a company will need to administer payroll and dividends and maintain more detailed records.

Once the potential transferor has weighed up the pros and cons, changing from a sole trade status to a company is reasonably straightforward. It needs careful advance planning as the new company will need to be formed, customers and suppliers advised, contracts changed etc ahead of the transfer date. There can be tax benefits from the transfer itself with the new company effectively purchasing the sole trade business from the proprietor. No funds need to change hands at the handover date but the purchase consideration is usually set up as a director’s loan which can be drawn on over a period of time. This can be a useful top up fund to draw on top of salaries and dividends tax effectively. There are other tax implications to consider for the transferor including capital gains tax. Overall though, if structured in the right way there can be significant one off and ongoing savings for the transferor and the new company from changing the business status in this way.

I would recommend sole trade businesses with annual profits in excess of £50,000 or businesses that have ambitious growth plans to give consideration to changing their status to a limited company. They may be surprised at the potential benefits and with professional support and a little effort it can be implemented fairly quickly and painlessly.

www.base52.co.uk

Something in reserve?

Reserves, retained profits, net assets, shareholders' funds. All are measures of what is left in a company after allowing for any liabilities. In other words, it's the surplus of assets - plant & machinery, stock, debtors and cash over liabilities - creditors, tax due, loans etc.

So why are reserves important? Well as the name suggests they are a bit of a contingency. Something for a 'rainy day'. Something to fall back on if trade and profits dip or to invest for future growth. In my experience, many small business owners don't pay enough attention to reserves (or the lack of them). Often they are focused on profits, cash flow and their own income - all of which are important. Building reserves or 'strengthening the balance sheet' as it sometimes referred to is arguably a more complete measure of how a business is performing and how it is evaluated by external parties. Weak reserves affect a company's credit rating so there is a tangible cost in not addressing this issue.

So what is a healthy level of reserves? The answer will depend to some extent on the maturity of a business, the sector, the shareholders' objectives and so on. For a mature business I would suggest that reserves equal to one month's average turnover should be a minimum. A more reasonable reserve might be around 3 months turnover. So a strong business with annual sales of £1m might have reserves of £250k. This business would be well placed to cope with sudden changes in circumstances. A weaker business with minimal or no reserves may be fatally wounded if it suffers a sudden fall in turnover or a cash flow crisis.

So if you are setting targets for your business you need to consider sales, profits and cash flow but think too about reserves. This means taking a cautious view of dividends and drawing no more than the business can afford. Building reserves takes focus and discipline but It could help your business stay around for the longer term.

www.base52.co.uk

Lifetime loyalty

I've been reading Terry Leahy's book - 'Management in 10 words'...and very good it is too. Terry Leahy was Chief Executive of Tesco for 14 years up to 2011. He presided over a period of the company's greatest growth and expansion, overtaking Sainsbury's and Marks and Spencer as the UK's largest retailers and expanding internationally on a massive scale. I was at Tesco for 16 years up to 2003 as a middle ranking finance executive so it's interesting to read about how the big decisions were made during some of my time at the company.

Terry is a marketing man and his success was built around listening to and looking after customers. A key decision was to introduce Tesco Clubcard, Almost all the big retailers have loyalty cards now but Tesco gained a major advantage by being first. Clubcard data enabled Tesco to understand customer shopping habits better and customers liked being thanked and collecting points for money off their shopping bill. Other examples of listening to customers were leading on the lobby for Sunday trading, the introduction of 'Value' lines, customer panels and store design.

Perhaps Terry's biggest legacy is introducing Tesco's 'Values'. These are a few short statements covering how Tesco looks after its customers and how people in the company work together to achieve this. The values were developed by staff at all levels and are complementary to Tesco's core purpose, 'To create value for customers to earn their lifetime loyalty'. Lifetime loyalty...now that's powerful.

The thing about the values is that they reinforced and also developed the culture at Tesco. Terry says it helped make Tesco a gentler environment. A move on from the masculine, macho culture of the 60s and 70s. The values helped guide decision making from senior management to the shop floor. If an employee was unsure how to deal with a customer query or complaint, the values steered them to 'follow the customer'

I left Tesco in 2003 and since then have run my own accountancy practice. I now deal with accounts and tax for a number of my ex Tesco colleagues, most of whom have gone on to run highly successful consultancy businesses. So why did they come to me for help? Well it may be that they think I'm a great accountant. More likely, it's the Tesco culture of loyalty to an ex colleague and they know that as an ex Tesco man I will always do my best for them as my customers.

So although retailing is a million miles away from accountancy, something of the Tesco culture and values has stayed with me and has shaped my current business. If that helps me to focus on gaining lifetime loyalty from our customers, that's no bad thing.

www.base52.co.uk

On blogger's block...

This is my first blog post of the new year and my first for some time. I have been suffering from a bad case of 'blogger's block' but new year, new motivation. So I'm going to TRY and blog about something useful (or at least interesting to me) every now and then over the next 12 months.

This is the time of year when things are generally a bit manic for accountants. The self assessment deadline is 31st January and inevitably a good chunk of this work gets wedged into December and January and it all gets a bit intense. But not this year. We are busy but its certainly not manic and for the first year in many we are not having to work weekends or late nights at this time of year. We even have some additional capacity and are taking on new clients for self assessment and other work.

So what's changed? Well we did make a concerted effort to encourage our clients to hand in their personal tax records a little bit earlier this year. We also have an experienced member of our team who has been focussing solely on self assessment work since last April. So better communication and better resourcing...and it seems to have worked!

So it has been very nice having a long Christmas break for a change and also having a bit more time to deal with other client work and even think about business development...and a bit of blogging.

I'd like to wish all our clients, suppliers and other contacts a happy new year and best wishes for a successful 2013.

www.base52.co.uk

Time for YouTube

Company video time. We are on Facebook, we are linking in and we are occasional tweeters and bloggers. So time now to embrace YouTube and add some content about our accountancy practice. But what to do?

Firstly some research. YouTube is the second most used search engine after Google so it is a great way of increasing exposure for a business. Not much on there from accountancy firms though. Most from the US as you would expect. Some having quite a formal, corporate feel. Some using wobbly cameras and Powerpoint slides. One memorable one showing a firm of auditors doing a really bad (and quite lengthy) rap. Then to the UK. Not much video content even on the web sites of the largest UK firms. One or two smaller firms with quite awkward looking accountancy types talking about their firms in little sound bites. All felt a bit scripted and formal.

So my producer and director is my son James who is involved in video production at his University television channel. He is quite clear about the brief. 'It needs to be snappy and punchy as people will switch off after about 90 seconds'. 'It needs to say a bit about who you are, what you do and how you help your clients. The personality of you and your firm needs to come across. That's it.' It was all very painless. The results have been uploaded to YouTube and we will add to our website shortly. Initial feedback has been positive and I am hopeful this will be a new way of engaging with prospective customers.

www.Base52.co.uk