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The whole purpose of tax planning is to save you tax and to put more profits in your pocket. That is why people are always looking at ways of beating the taxman, because they benefit from tax planning.
Robert Kiyosaki, author of the number one bestselling book ‘Rich Dad Poor Dad’, says:
‘Every time people try to punish the rich, the rich don’t simply comply, they react. They have the money, power and intent to change things. They do not sit there and voluntarily pay more taxes. They search for ways to minimize their tax burden’
Why are tax saving strategies important?
When I (co-author Amer) started investing in property the challenge to me was not to just grow a property portfolio but to grow it in the most tax efficient way possible.
It soon dawned on me that implementing just the simplest of tax saving strategies was going to help me to make considerably more profits.
Don’t fall into the trap where you only think about tax when you are considering selling or even worse after you have sold the property.
By taking tax advice at the right times and on a regular basis you will legitimately avoid or reduce taxes both in the short and the long term.
This means that you will have greater profits to spend as you wish.
Clear ‘Entrance’ And ‘Exit’ Strategies for your Property Business
When you sit down and analyse properties that you are considering for investment, you will no doubt look at how much rental income the property will generate and what you expect to achieve in capital appreciation.
Knowing the estimated tax liabilities right from the outset will save you from any nasty surprises in the future.
Your personal circumstances can change at a whim. The last thing that you want to do is fall into a situation where you are forced to sell a property but are unable to pay the taxman because you never considered your tax situation.
Keep Your Tax Strategy Up to Date with Your Investment Strategy
When you are deciding on the property investment strategies that you are going to adopt it is a good idea to talk them through with a tax adviser. If your investment strategy changes then it is likely to have an impact on your tax strategy, so it should be reviewed with your tax adviser.
Your tax strategy will go hand in hand with your investment strategy and will help you to keep focused on your property investment and financial goals.
Using Tax Planning to Improve Cash Flow for your Property Business
One of the challenges that you will face as a property investor is cash flow. In other words, you need to make sure that you have enough money coming in from your property business to pay for all property related bills, maintenance and repairs, and of course tax on the rental profits.
Remember, timing of expenditures can be the difference between a ‘high’ and a ‘nil’ tax bill. Therefore, keeping in regular contact with your tax adviser, especially when coming towards the end of the tax year can have a significant impact on your property cash flow.
Avoiding Common Tax Traps
There are many tax traps that you can fall into if you have not taken any tax advice at all, not to mention the numerous great tax planning opportunities you will miss out on too. It is not uncommon to hear stories about investors who have made a £100,000 profit on a single property and then sold it without taking any tax advice whatsoever. If you fall into this situation, then you could be hit with a hefty tax bill.
It will hurt you even more if after selling you realise that you could have easily turned the tax liability to zero had you taken some simple tax advice.
Good tax advisers will know of the most common traps that you are likely to fall into, so a few minutes spent wisely could save you thousands in taxes.
Asking HMRC For Tax Advice
From time to time people tell the TaxInsider.co.uk office that all the effort that goes into offering them tax advice is a waste of time, and tax consultants are also unnecessary, because you can simply telephone HM Revenue & Customs (HMRC) and get free advice. However, free advice is not always the best advice.
Making Use Of HMRC Services for Tax Planning
Getting advice from HMRC in some circumstances is always a good idea – for example, they operate a number of “clearance” services whereby you can set out the details of a proposed transaction for them, and they will tell you the tax consequences they believe will flow from it.
Some of these clearances are enshrined in statute – there are some quite draconian examples of anti-avoidance legislation which can also catch quite innocent commercial transactions, and there is a statutory process for obtaining HMRC’s agreement in advance.
There are also other informal HMRC clearance procedures which can be useful when you are considering a transaction where the tax treatment may turn on a matter of opinion, and it is useful to know HMRC’s opinion in advance.
It is also possible to agree valuations of assets for capital gains tax purposes where these are needed to complete a tax return – much better to have the discussion before you put the return in than to hope for the best and submit it, only to have the same discussion as part of an HMRC “Aspect Enquiry” where the possibility of penalties looms if they consider your valuation was a little sloppy!
Tax specialists use such services frequently on behalf of clients, and they are a great help in providing a better service for them.
The Drawback of Using HMRC Services for Tax Planning
However, the “help” that the people who contact Tax Insider are referring to is the “help” you can get by ringing HMRC up while filling in your tax return, or when confronted by a tax situation that you do not understand. In some cases, no harm will result, and you may even get the right answer, but on the whole professional advisors am very nervous about this “Do it yourself” approach to tax.
HMRC’s own policy on giving advice is contained in their “Code of Practice 10”, and the following sentence from that document illustrates a major gap in their service:
“However, we will not help with tax planning, or advise on transactions designed to avoid or reduce the tax charge which might otherwise be expected to arise”.
