property investors network

The true cost of the Budget for property investors

Given the huge Budget deficit that the country is in, I don’t think the new budget is all that Bad! It could be a lot worse.

Yes it is a shame that VAT is going up to 20% which is very high but will that extra 2.5% have a real impact n your purchases? Probably not! Capital Gains Tax has gone up to 28% for higher tax payers but remember you only pay that when you sell your property. If you don’t sell you don’t pay it so that will not affect many long term buy and hold property investors!

But there was one change in the Budget which could make a massive different to all the switched on Property investors

Not many property investors know this but there is a way to massively reduce your personal income tax liability, thanks to a change in the Capital Allowance scheme a few years ago.

Basically if you buy a property that is used as a house of multiple occupation (3 or more people sharing) you can get a capital allowance against all of the “plant and machinery” in the communal areas. Usually this allowance is about 20% of the purchase price which you can offset directly against your personal income tax liability in that tax year. This means you could claim all your tax back from the tax man each year!

For example: If you buy a Multi let property for £200k you could get a capital allowance of approx £40k to offset against your income. If you PAYE income was £40k you would get back all of the Tax you had paid that year. In the 2009 to 2010 tax year you could offset up to £50k against your personal Tax. In the last Budget the former Chancellor raised this to £100k per year. This was a great strategy as it meant if you earn up to £100k income per year and you could PAY NO tax on that income by purchasing up to £500k worth of multi let properties in that Tax year. This was a strategy we shared earlier this year on one of my free tele seminars.

The Bad news in the Budget on 22nd June 2010 was that the maximum you can offset against your income for the 2010 to 2011 tax year is being slashed to just £25k.

So the important point here is that if you are thinking about buying a Multi let property in the near future make sure you do it before the end of this current tax year to get the maximum you can offset against your personal tax. You may want to wait until after 1st October 2010 as this is when the new Planning permission requirement for HMOs introduced on 6th April 2010 is being relaxed. Alternatively you could purchase existing HMOs from retiring landlords as these automatically have the planning permission.

I suppose a lesson here is that the property market is changing so fast when you learn a new strategy, as long as it is appropriate for you, then you should apply it straight away because if you sit on it and fail to take action, by the time you get around to it, the market may have changed and it may no longer be appropriate. This is why I have just completed the third edition of the Amazon No 1 Best Seller property book “Property Magic” which should be available next week. This edition has been revised for successful investing in 2010 and beyond.

It will still be a valid strategy buying multi let properties after the end of the tax year but you just won’t be able to get such a huge tax benefit as you will if your purchase them this year. So take action now!

Kind regards

Simon Zutshi
Founder Property investors network

15 thoughts on “The true cost of the Budget for property investors

  1. John Parkinson

    Great Blog Simon as always, very useful. Note to all new prop investors – Just get started, with the right advice (see simon) you can’t fail. But don’t put it off.
    Good luck all

  2. Tony Murray

    Simon,
    The worst part about this budget for landlords is the change from 51 to 30 in the rating for LHA this will impact on landlords really hard. Also the reduction in LHA after 12 months to 90% of LHA will have a big impact on landlords as people with a child of 5 will now have to switch to Job Seekers Allowance from the Income Support benefit previously on.
    I think this budget is a nightmare!
    Tony

  3. Sue

    If anyone can fill me in on the details here I would like to know as I was not aware the rules were different for HMO’s!

  4. Pingback: The true cost of the Budget for property investors | Keys2Home

  5. Tomas

    Interesting point on taxes and strategies. I did see anyone else writing about that. Thanks.
    I also didn’t know that new gov relaxed planning permission for HMOs form October. I will need to look at this too.

  6. Simon Zutshi

    Hi Tony,
    Yes I agree that the changes to LHA will affect many investors myself included. However strange as they may sound I am ok about these changes as I think there needed to be a serious shake up of the welfare state if this country is ever going to get out of Debt. We need more people getting back to work, paying taxes and contributing to society.
    Regards
    Simon Zutshi

  7. Tom Barratt

    Can someone point me in the right dircetion (or tell me) what is being relaxed in Oct concerning HMO planning permission? Im hoping this could be the change I have been waiting for!
    thanks
    Tom

  8. Tony Murray

    Hi Simon,
    Thanks for your reply.
    Without getting into a political debate I agree it would be great the scenario you give above however my main worry is that it is okay to “get the lazy scroungers” as some have described to get off their backsides and work but it can only work if there are jobs for these people to go too.
    As for property (far more interesting) thanks for all your tips and emails, great work.
    Tony

  9. Anthony

    Is their a way of looking up these new 30 rating rather than 50 rating LHA rates for specific areas ?
    I am contemplating a refurbishment in an area of high unemployment……..and I want to establish the future LHA rate before I start.

    Anthony

  10. Phoebe Salter

    We are lucky, we have Housing Benefit tenants to keep the market going!! I’m just dreading seeing those rents being hiked up by rising interest rates

  11. Patricia

    If you buy a house used as a single dwelling and turn it into an HMO you would very much devalue that property if after many years you decide to sell it in the open market, wouldn’t you?

  12. Simon Zutshi

    It really depends what you do to the house. For example if you add a few ensuite bathrooms this will enhance the value of the property. (Although if you use downstairs reception rooms as bedrooms of course do not put ensuite in these as this would be strage if yuou wanted to use it as a family house later on.

    When you add fire doors you can add ones that are a bit more expensive but dont look like fire doors.

    The addition of fire alarm and emergency lighting would loud out of place in a family home but this could be removed if need be.

    However and this ios the main point. Why would you wnat to trun it back into a family home. If you buy correctly in the first place ie in and area with good rental demand and do you calculations to make sure it stacks up why would you wnat to sell an HMO that is giving you a great cash flow. I know some people may say that they may not want to manage it but my response is that you should not be managing it in the first palce. Get someone else to do it so that it is a true passive income.