Business Man Saving Money

Are you a business owner looking to build a robust retirement fund through property investments but unsure about the most tax-efficient approach?

As a limited company owner, declaring hefty dividends often means paying a substantial amount of tax, leaving you with minimal capital to invest in the property market. Conversely, if you operate as a sole trader and find yourself in a higher tax bracket, it can feel like a constant struggle against high taxation rates.

But what if there’s a way to optimise your property investments while minimising your tax liability?

Introducing the BRRRR Strategy: Buy, Refurbish, Rent, Refinance, Repeat

The BRRRR strategy is gaining popularity among savvy property investors. Here’s how it works: you purchase a property in need of renovation, say for £200,000, invest £10,000 in refurbishments, and increase its value to £240,000. After renting it out, you refinance the property to release its equity.

Now, you might be wondering, “How does this benefit me when I still have to pay taxes?”

Two significant advantages come into play:

1. Tax Efficiency for Limited Company Owners

If you own a limited company, you typically pay a 19% tax on profits. While paying tax is unavoidable, 19% is a reasonable rate.

Here’s the key: instead of withdrawing your profits as dividends and facing dividend taxes ranging from 8.75% to 39.35%, you can lend the remaining 81% to your property company for investment purposes. This way, you avoid dividend taxes and put more of your money to work in your property ventures.

Let’s illustrate this with an example:

• £100,000 profit generates £22,750 in corporation tax.
• By loaning the remaining £77,250 to your property company, you can kickstart your property investment empire.

Compare this to withdrawing the balance as dividends at the higher rate of 33.75%, resulting in £26,071.87 in personal tax. In this scenario, you can invest only £51,178.13 in property. That’s a 50.9% faster investment growth rate in the first example.

2. Leveraging Property Equity

When you refurbish a property, it gains value, allowing you to remortgage it to access additional equity. Typically, rental properties require a 25% deposit.

In our previous example, after investing £40,000 into the property and spending an additional £10,000 on refurbishments, you have a property worth £240,000 with a £160,000 mortgage. You can remortgage and access an extra £20,000 in equity, and the best part is, this sum is not subject to taxation since it’s considered an additional loan, not income.

Moreover, if you hold onto the property indefinitely without selling, you won’t incur any taxes until you eventually do so.

In conclusion, the BRRRR strategy coupled with sound accounting practices can significantly enhance your property investments while minimising your tax liabilities. It’s essential to partner with an accountant well-versed in property investments to maximise these advantages.

Are you ready to explore tax-savvy property investment strategies with an experienced accountant? Contact us today to take your property investment journey to the next level!

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