This article explains how taxes work at Property Partner. Knowing what we have to pay taxes on and how to report them are key to investing. Understanding taxes can help us to better plan our investments whilst also complying with the tax law.
- How Investments are structured in Property Partner
- Case study 1: Alex – A basic rate taxpayer
- Case Study 2: Jess – A higher rate taxpayer
- Case Study 3: Paul, the self-employed
- How to pay lower taxes at Property Partner
- How to report your Property Partner taxes
- Final thoughts
This post also shows how you can take advantage of the tax breaks we enjoy here in the UK. When I say that the UK is a tax haven people laugh at me. But between pension wrappers (SIPP), ISAs, junior ISAs, EIS & SEIS tax reliefs, capital gains and dividends allowances, you can legally avoid paying most of the taxes.
Whether you make a profit by selling property, collecting rent or development loans payments, you need to pay a tax on the profits. But don’t worry, we will soon see that it’s not that bad. The government actually tries to encourage saving and investing because it’s good behaviour. They won’t have to do the heavy lifting later on for us.
Property Partner makes it easy for us to report our taxes. They offer a tax breakdown document we can download for any time period as we will see later in the reporting section. Now let’s understand what kind of taxes we incur in the first place.
How Investments are structured in Property Partner
Property partner has structured its investments using SPV companies. SPV means “Special purpose vehicle”. In simple words, SPV means a company used for only one purpose. In our case, one SPV owns 100% of one property, and we, investors, own shares in the SPV. So if I own 10% SPV shares, it means I own 10% of the property.
SPVs are one of the most common ways to own a buy-to-let using your limited company. It’s clean and you get a mortgage easier than a trading company. That’s because a new company has no debt or other obligations for the lender to worry about. It’s one company for one property. Simple.
The tenants pay rent to our SPV and Property Partner distributes the rent in the form of dividends to investors. But rent only accounts for the first part of our total returns. If you invest in property, I’m sure you know that the most important gains can be made when the property goes up in value. In other words, when you sell.
Selling a property at Property Partner effectively means selling your shares in the SPV. Selling your shares at a higher price will generate Capital Gains which is what we pay tax on.
So if we bought a PP property for £10,000 and sold it later for £15,000, we’d have to pay a capital gains tax on the £5,000 profit. How much depends on your personal situation (and a big chunk of it could be zero!). Don’t worry, it’s not rocket science and the tax case studies below will help you understand it better.
The Three Tax Pillars Explained
All Property Partner income falls into 3 categories. It’s either in the form of dividends, interest or capital gains.
Rent – Dividends
All the rent you will ever receive from Property Partner properties is in the form of dividends. Because you own shares in the SPV that owns the property, PP pays you dividends each month. The dividend allowance for the 2019/20 tax year is £2,000. Anything higher than that is subject to dividend tax (7.5% or 32.5% or 38.1% – depending on whether you’re a basic, higher or additional rate taxpayer)
Selling property – Capital gains
You can either sell your property shares in the secondary market (to other investors) or Property Partner may sell the property for you as per the exit mechanism. Regardless of your exit strategy, selling a property at PP generates the same form of tax: Capital Gains, in short CGT.
For the 2019/20 tax year, the CGT allowance (HMRC) is £12,000 per tax year, per person. So if you sell a £10,000 property for £15,000 and make a £5,000 profit, you don’t have to pay any tax on it. Otherwise, the CGT is 10% (basic rate) or 20% (higher rate taxpayer).
Development loans (debt) – Interest
One of the most lucrative returns you can get in today’s low-interest environment is by investing in development loans. Property partner occasionally offers those products to investors.
The idea is that you give your money to a developer partner, they build houses and pay you back the interest when they’re done. For example, they recently raised funds to build a 3-bed house in Notting Hill, London and 12 houses in Salcombe, South Devon. Development loans typically offer a 10-11% net return per year and run for a fixed term, usually for a year, more or less.
Property partner offers an ISA for its development loans. So if you invest in these products inside your ISA all your future gains will be tax-free. Remember: you can hold more than one ISA as long as you don’t exceed the yearly allowance of £20,000. So you can have £10,000 in a Property Partner ISA and £10,000 in a Stocks and Shares ISA for example.
You can also transfer your existing ISAs into Property Partner.
If you invest in development loans outside an ISA you still get a personal savings allowance.
|Income Tax band
So between dividends allowance, capital gains allowance and ISA investments, one can theoretically invest tax-free 🙂
Let’s have a look at three typical examples.
- Alex, a full-time worker on a £30,000 salary.
- Jess, a full-time worker on a £60,000 salary
- Paul, a self-employed investing £100,000 through his limited company
Case study 1: Alex – A basic rate taxpayer
Alex, the civil engineer earns £30,000 per year from his full-time job. His other investments are all tax-sheltered, either in ISAs or in pensions. He heard of Property Partner from Foxy Monkey and decided to invest some of his savings.
Alex recently sold some London PP properties he bought in 2015. The properties were bought at £40,000 now worth £50,000 so he also just made a nice £10,000 profit from selling those. Right now, Alex’s portfolio looks like this:
- £30,000 in rental property producing a 5% net rental return
- £20,000 in development loans producing 11% net interest (inside an ISA)
- £10,000 profit from selling some 2015 London properties
Here’s how Alex’s portfolio will look like at the end of April 2020:
5% of £30,000 will produce a £1,500 in rental income. As we said above, rental income in Property Partner comes in the form of dividends. The dividend allowance for 2019/20 is £2,000 so that’s all covered by Alex’s allowance for the year. Tax on rent: 0.
Alex has invested £20,000 in some development loans and will earn 11% on it. That’s £2,200 in the form of interest. Since Alex’s investments are inside an ISA he doesn’t have to pay any tax on it. Tax on debt income: £0.
Oh… the ISA beauty! £20,000 in an ISA doesn’t mean that Alex invested all the money in a single year on a £30k salary. He could’ve invested £5k every year for 4 years or transfer in an existing ISA. Had his investments were not ISA sheltered, he’d have to pay 20% tax on the gains, since he’s a basic rate taxpayer. 20% on £2,200 = £440. Ouch!
Alex also sold some properties on Property Partner from which he made a hefty £10,000 profit. The capital gains allowance for 2019/20 is £12,000 so his £10,000 profits are covered by the allowance. Neat. Tax on property sales: £0.
So excluding the tax Alex pays for his monthly salary, here’s what Alex will pay in taxes for his Property Partner investments:
Annual Property income: £13,700 (£1,500 rent +£2,200 loans +£10,000 property sale)
Tax on rent: £0
Tax on debt income: £0
Tax on property sales: £0
Total property tax: Zero
Believe it or not, there is no tax to pay even though most of the profits came from non-sheltered investments.
Case Study 2: Jess – A higher rate taxpayer
Jess, the project manager earns £60,000 per year. That makes Jess a higher-rate taxpayer. To keep things simple, Jess also has her other investments tax-sheltered in ISAs and SIPPs and she receives no other income apart from her salary.
Jess also sold £50,000 worth of property in Property Partner for £65,000 so she made a £15,000 profit from the sale. Here’s Jess Property Partner portfolio:
- £60,000 equity earning her 5% rental income
- £20,000 in development loans earning 11% net interest, (£10k in an ISA, £10k outside)
- £15,000 profit from selling properties
Here’s how much tax Jess will have to pay:
£60,000 in property equity at 5% rental return will make Jess £3,000 per year in rents. Her dividend allowance is £2,000 so Jess will pay 32.5% dividend tax on the remaining £1,000 because she’s a higher rate taxpayer. Tax on rent: £325.
Jess has put £20,000 in development loans but only £10,000 are in an ISA. So she’ll have to pay income tax on the other £10,000. Because she’s a higher rate taxpayer, she will have to pay 40% tax on the taxable interest (not 20%). £10,000 at 11% = £1,100 profit. But don’t forget that £500 of it is covered by her personal savings allowance so Jess will pay 40% only on the remaining £600. That’s £240. Tax on debt income: £240.
Her £15,000 property sale is also taxable but only £3,000 of it since £12,000 is covered by her CGT yearly allowance. £3,000 at 20% capital gains tax rate is £600. Tax on property sales: £600.
Annual Property Income: £20,200 (£3,000 rent +£2,200 loans +15,000 property sale)
Tax on rent: £325
Tax on debt income: £240
Tax on property sales: £600
Total tax: £1,165
That’s not much tax (5.8%) given her total property income of £20,200. But as a higher rate taxpayer, you need to be careful after using up all your allowances.
Case Study 3: Paul, the self-employed
Personally, I invest in Property Partner as a limited company because I’m self-employed and most of my income stays in my company these days. It would be tax inefficient to take a high income from my company and then invest, so I invest pre-income-tax by investing through my limited company.
My aim is to have £50,000 invested in Property Partner through my Ltd. Let’s have a look at Paul.
Paul invests £100,000 through his limited company. Paul’s portfolio looks like this.
- £70,000 property equity at 5% net rental income
- £20,000 development loans at 11%
- £10,000 capital gain from a property sale
No diagram here, mainly because a Limited company has a simpler tax system compared to individuals. £70,000 at 5% will generate £3,500 per year. The company will have to pay corporation tax (CT) on the profits but here’s the main difference when investing as a limited company:
Because dividends have already been taxed at the company distributing them (Property Partner’s SPV) the limited company will NOT have to pay tax on the dividends received. As a result, this means that all rent comes tax-free 🙂
This is awesome and it’s an added benefit when investing as an Ltd. So Paul’s company won’t pay any taxes on the £3,500 rent. Tax on rent: £0.
What about development loans? These are taxed as profits because they come in the form of interest. 11% of £20,000 = £2,200. The corporation is 19% for this tax year. Assuming the business does not have any expenses (which is highly unlikely), the tax will be 19% of £2,200 = £418. Tax on debt income: £418.
Unlike individuals’ allowances, capital gains are also liable to corporation tax. £10,000 at 19% = £1,900. Tax on property sale: £1,900.
Annual Property Income: £15,700 (£3,500 rent +£2,200 loans +10,000 property sale)
Tax on rent: £0
Tax on debt income: £418
Tax on property sales: £1,900
Total tax: £2,318
This tax may look high, but remember that’s on a total investment of £100,000. Plus you can easily add some business expenses to reduce your tax liability.
But don’t forget that investing as a business means that at some point you’ll have to eventually take the money out of the company to enjoy it personally. There is probably an additional tax to pay there, but it all depends on your personal income at that time.
For example, I plan to grow a lump sum in the limited company and only start withdrawing 5-10 years or more down the line when I take a year off work or become financially independent. Having no other salary when in FIRE will make regular withdrawals almost tax-free while also benefiting from being able to invest my company profits without incurring any income tax before investing.
Tip: To invest in Property partner as a company you will have to get a LEI code because… regulation. It’s a 15-min thing. Read how to get a LEI code and why.
How to pay lower taxes at Property Partner
By now you must be wondering. It’s good to know how taxes work at Property Partner, but I want to know HOW I can reduce them. Me too! So here I sum up everything you can do to reduce your tax bill when investing at Property Partner.
The best way to save on taxes is to invest in those property offers where you’re investing tax-free or low-tax. This is why it’s very important to know your allowances and use them.
1. Open an ISA for development loans
If you invest in development loans then, using your ISA is a no-brainer. This way all gains are tax-free. You can invest up to £20,000 each year and you can have more than one ISA as long as you don’t exceed the yearly allowance.
But the good news is that even if you don’t want to use your ISA, you’re getting a £1,000 personal savings allowance as a basic rate taxpayer, or £500 as a higher rate taxpayer. Sorry, 0 allowance for additional rate taxpayers. In other words, a basic rate taxpayer will get their first £10,000 (non-ISA) debt investments at 10% return tax-free. £5,000 for the higher rate ones.
The most painful tax is the one on development loans (interest) after having used your allowance. That’s because it’s taxed as an extra “salary”. So if you’re a basic rate taxpayer, 20% tax may not be that high but as a higher rate taxpayer (earning more than £50,000) then 40% tax IS too much. Which is why having the development loans inside an ISA is a great option!
2. Use your dividend allowance
Since Property Partner pays rent as dividends, we get a generous dividends allowance. £2,000 to be exact. That’s £2,000 on the gains, not on how much you have invested. By use your dividend allowance, what I mean really is, know about your dividend allowance.
So at a 5% net rental return per year, it’ll take £40,000 in property rental investments to use up your £2,000 yearly dividend allowance. (£2,000/5 = £400*100 = £40,000). At a 4% rental return that’s £50,000 of property you can own and receive tax-free rent each year!
If you’re a basic rate taxpayer, the property equity/rent is a good option since it’s taxed very low (7.5%) until you hit the higher rate tax threshold. After that, rent (dividends) will hit you with 32.5%. Compared to the 40% of debt products that’s the lesser of two evils. However, development loans offer much higher returns in a short time so the return compensates for the greater tax (but at a higher risk!).
|Tax rate on dividends over your allowance
Dividend tax rates over your allowance. Source: Gov.UK
3. Use a limited company if you’re self-employed or on a very high salary
If you’re investing in Property Partner through your limited company then it makes sense to invest in an income-heavy portfolio. That’s because you take full advantage of the double-taxation rule saying that rent (dividends) are already taxed at source (Property Partner) so you will NOT be taxed again in your company. Essentially, that makes rent collection tax-free.
Sure, that’s not to say the money is in your pocket since you will be taxed later on for withdrawing it out of your company. But as we already said, this makes you very flexible with withdrawals. Becoming financially independent puts your future self in a very low tax bracket 🙂
The cons of this method are that it requires a bit of extra hassle to set up a company and file yearly accounts but your accountant can do that if you’re keeping score. Let me know if you need one.
You will need ta LEI code to invest as a limited company at Property Partner (or in other places, really.)
4. Invest with your partner
If you have a partner, then you can split your investments to utilise both your allowances and ISAs. This is a no brainer as long as you trust each other obvs 😄
5. Tax-gain harvesting
This is a more advanced strategy that makes sense once you get more serious with tax optimisation at larger amounts. In short, the goal is to save us from getting hit by a big tax bill years from now, by making use of our allowances each year without having to exit our investments. Let me explain.
The capital gains allowance of £12,000 per year is lost if not used. It’s not unusual to have a few properties that go on for years until you decide you sell everything at once. However, that’s not a good strategy if I put my tax hat on.
So instead of realising your gains in 5 years time, you can realise your gains by selling your property shares once a year and then buy different properties. This way you “harvest” your gains by using your yearly allowance each year and start from a higher high every time. It’s a really clever idea that can save you thousands of ££ in future taxes.
Note: I believe selling and buying the same property does not qualify for the capital gains allowance in the eyes of HMRC. But there are plenty of properties at Property Partner and you can even find a similar one to suit your strategy. In fact, here’s ALL of them 🙂
Selling in the secondary market is free of charge. However, to buy in the secondary market you pay a one-off 1% fee plus 0.5% stamp duty. This makes the strategy less worthy but as a Premium investor, you enjoy some early-access new listings at 0% fee plus some cashback when buying in the secondary market. Which means that this strategy can work brilliantly if you’re investing larger sums.
I believe if you have a large portfolio it’s harder to do so in the secondary market due to low liquidity, but the liquidity is improving thanks to the cashback mechanism (PP call it resale market rebates).
So basically, if you’re an investor buying in the secondary market above £20k in a month, you get money back up to 6%. That’s when you either buy secondary shares or buy through bidding (what traders call a market maker). This makes tax-gain harvesting an even better strategy.
Tax-gain harvesting is a big advantage of Property partner versus traditional property, where it’s not so easy to sell your property and buy a similar one every year or so 🙂
6. Use the Premium Service of Property Partner
You need to invest £25,000 or more to qualify for the Premium service at Property Partner. The premium service has some advantages worth mentioning:
- Early-access to properties at a zero fee. This makes tax-gain harvesting a much better proposition now.
- A dedicated account manager. Once you tell them your goals they can provide some insights. They can even build an investment plan that’s tailored to your individual circumstances (tax considered, although they cannot provide any tax advice).
- Time horizon, goals, risk appetite and taxes are all important. Maybe you also have existing holdings outside of Property Partner so a dedicated account manager should be able to help here. Thanks to this blog, I’ve built a good relationship with Kyle, the person who manages the high net worth individuals. Let me know if you want an introduction ([email protected]).
7. Charity donations
Another way you can reduce your income is by donating to charity. You get tax relief on your donation if your charity is registered with HMRC through Gift Aid and most charities are. You can claim back the difference between the tax you’ve paid on the donation and what the charity got back.
How to report your Property Partner taxes
If after reading this article you’re screaming aaah that’s so complex I’ll never be able to do that, I get it! I don’t blame you. But the reason I wrote this article is to give you the benefit of knowing what you’ll have to pay and how to reduce it.
By understanding the process you can know whether you should invest more in development loans, for example, and what to expect on your tax bill. And between Property Partner reporting structure and perhaps an accountant once a year, this whole thing can become super simple and tax-efficient. Don’t make taxes put you off investing.
First of all, the good thing about Property Partner is that it already takes care of your tax calculations. So it offers a nice breakdown of how much capital gains, dividends and interest you have received. That’s perfect because it makes our life super easy at the end of each tax year. Here’s my February tax statement:
Although I selected an arbitrary month, you can always select the entire tax year period for your tax return. They can even show you a per-property income breakdown which is cool if you wanna see some big wins (or big losses!).
The easiest way to report your taxes is to get an accountant to prepare the self-assessment tax return for you. That should cost around £100-150. But you can start looking for an accountant when you reach the tax threshold for filing a return in the first place! Assuming you have no other income apart from your salary, and you invest as a Person (not a Business) here’s when you should start taking action:
If you earn up to £2,000 per year in rent (2019/20 dividend allowance) then you don’t need to do anything. From £2,000 to £10,000 rental income you just need to contact HMRC and tell them to adjust your tax code. If you do earn more than £10,000 in rent (dividends) each year then you need to file a self-assessment return, if you aren’t already.
As the image above shows, Property Partner does the heavy lifting for us by reporting the capital gains we have realised each tax year. They deduct fees and stamp duty costs which is great because only the net amount matters. If the capital gains amount is up to the CGT allowance, there’s nothing to do either. The CGT allowance for the 2019/20 tax year is £12,000.
If it’s more than that, you need to report it to HMRC either by using their real-time CGT service and paying straight away or by including it in your self-assessment annual report as usual.
If the development loans profits are inside an ISA, there’s nothing to do regardless of how much money you made.
If the interest you receive is £10,000 or more then you need to file a self-assessment report. You can calculate how much capital gains you should pay by following the HMRC CGT calculator which is VERY easy to use. It asks you a few questions and then it shows you the capital gains tax you should pay. For anything less than £10,000 I’d contact HMRC. They say that if you’re employed or getting a pension, HMRC will change your tax code so you pay the tax automatically.
If you do have other income that is not in ISAs or Pensions, then you should consider filing a self-assessment return. Always ask your accountant or a qualified person! That’s the best course of action when in doubt.
Property Partner gives us a great way to invest in property while also taking advantage of tax allowances. We saw how taxes work at Property Partner and what UK taxpayers can do to reduce them.
Although taxes are very important, don’t stress too much about it. As Warren Buffett likes to say: The first rule is to never lose money and the second rule is to never forget rule no 1 🙂
We first need to make money and then to shield it from tax as much as possible. This is why we diversify by investing in different locations and various asset classes to keep the boat steady.
Personally, I believe investing in Property Partner has allowed me to make money in a very stable way which is also backed by property. My personal returns are slightly higher than the advertised rate of 7.2%. I’m due for a property portfolio update post! But Property Partner is not the only way I invest. I have other investments in stocks and shares and a small allocation in bonds, cash and p2p lending.
Disclaimer: The above is not tax advice and should not be considered as such. I’m not a qualified tax or financial advisor. Although I’ve written the tax article to the best of my knowledge, my thoughts can be wrong and you’re liable for any losses and for paying your taxes. As always, do your own research and seek professional advice.
Disclaimer 2: I have not been paid by Property Partner to write this article. However, this article contains affiliate links and I will get paid if you invest in Property Partner using my affiliate links.
Disclaimer 3: My wife prepared all the graphics of this post and I think she has actually done a great job for a hobbyist. If you want to work with her, let me know 🙂