Tax Efficiency For Homeowners

I think it is fair to say that the recent Budget has left us with the impression that we will be paying higher taxes for many years into the future.  Although higher rate earners are already being hit with a tax rate of up to 50%, I do not think rate hikes will end there.  Directly or indirectly I can see lower rate tax payers shouldering most of the cost of the financial crisis we find ourselves in.  So what strategies do taxpayers adopt in connection with housing to combat higher taxes?

 

Firstly for people with mortgages consideration should be given to offset mortgages that allow a mortgage holder to offset their savings against their mortgage.  If you have savings and place them against your mortgage you are effectively cancelling out your mortgage interest with your savings.  It is likely you are being charged a higher rate of interest on your mortgage than you are receiving from savings, so placing your savings against your loan can make good sense.  This type of mortgage is particularly relevant to the higher rate tax payer, as you would be taxed at a higher rate on your savings if held away from your offset plan.  You may instead opt for a borrow back mortgage that allows you to overpay on your mortgage and borrow this overpayment back at a later date.  This mortgage has the same overall effect of the offset plan, but care needs to be taken with this type of mortgage as some lenders having taken overpayments may be reluctant to lend it back to you due to changes in their lending criteria.

 

For people with cash in the bank who are prepared to take some risk the buy to let market could be the answer if you want tax efficient returns.  The Centre for Economics and Business Research thinks that house prices have only a little further to fall and prices could start picking up next year.  This statement is a revision of their earlier forecast were they expected house prices to fall 40% from their peak.  This upbeat assessment has a measure of support from the Land Registry that showed house prices had only fallen 0.4% in March the lowest fall in nearly a year, and the Royal Institute Of Chartered  Surveyors reporting new buyer enquiries increasing at the fastest rate since 2003.  

 

So with this back drop it may be time to enter the market.  I would estimate that a semi property costing £100,000 could yield up to 6.5% per annum gross netting down to perhaps 4% provide you have a good steady tenant and 2.5% for the proposed 50% taxpayer.  Although these rates of return do not seem high, they compare favourably with deposit rates, but some effort has to be put in to achieve these returns.  However the big gain could come when you sell the property as capital gains allowance for a couple amounts to the first £20,200 of your gain being tax free.  The rest of the gain is then taxed at 18% regardless of your tax rate.  If by 2014 house prices have picked up by say 50% then a tax payer would not only have received a better rate than deposit but also have made £50,000 gross netting down to £44,636, therefore only paying tax of just over 10% on the total gain if all the rates stay static.  This scenario is potentially very attractive and may be used by an increasing amount of investors, if they buy into the notion that due to a lack of new builds in the last couple of years that an undersupply of properties will occur in the medium term and therefore force prices up.

 

Purchasing a property is usually one of the biggest financial transactions you will carry out, so it is worth contacting an Independent Financial Advisor.  Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.