Changes to Property Taxation Means you Could be Making '45%' less than 10 Years Ago

Property Tax

Truly the worst thing about advising property clients is that every so often, you meet a new client and they start to tell you about their plans and the work they are doing, only for you to discover that because they are speaking to an adviser too late in the day, they have missed an opportunity – often to save a great deal of money.  It happens more often than I’d like.
Because of this I always tell clients to keep us informed of everything they are doing. Sometimes that will mean telling us things that we can add little or no value to, but in those circumstances where we can add value, it is worthwhile. Even the most experienced of property clients needs advice if, for no other reason than to keep up with the huge number of changes that have emerged in recent years in property taxation.
I was thinking about this recently and I was wondering about the real scale and impact of all those tax changes and, for reasons I can’t explain, I thought it might be interesting to take a much closer look.  And when I did, I was truly staggered at the outcome.
To demonstrate the point, I took a simple example. Mr X is employed and earns £100,000 as an IT consultant. He has inherited some money and built up some small savings, which aren’t earning much, and has decided to buy a small buy-to-let investment to make his savings work a bit harder. He currently lives with his wife and children in their modest semi-detached home.
He has found a small house to buy and agrees a price of £250,000, against which he gets a buy-to-let mortgage of £160,000 at a fixed rate, interest only mortgage of 4% (say, £6,400 each year).
He rents the house for 10 years at a rental of £15,000 per annum and incurs other costs such as repairs, insurance and management fees of £5,000 each of those years. At the end of 10 years he sells the property for £350,000.
Using the tax rates of 2005 for these transactions, Mr X would have paid the following taxes:
Stamp duty on purchase = £2,500
Income tax on rental £1,440 x 10 years = £14,400
Capital gains tax on disposal = £20,600
Total return over 10 years net of tax = £98,500
If we take a look at exactly the same circumstances today, he would be taxed as follows:
Stamp duty on purchase = £10,000
Income tax on rental = £4,720 x 10 years = £47,200 (actually a net loss after tax!)
Capital gains tax on disposal = £24,836
Total return over 10 years net of tax = £53,964
In other words, due to changes in the overall tax burden, the same gross return has generated 45% less after tax!  It’s a staggering difference and goes a long way to explaining why the small buy-to-let investor is being pushed out of the market.
The good news, however, is that with good planning and a clear investment strategy, it is possible to mitigate the worst of this – which I guess leads me back to where I started.  The importance of getting timely as much as good advice.
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