Nobody likes paying taxes. In fact most people hate paying taxes, sometimes so much so that they will do anything they can to make sure they pay as little as possible.
This can be a sensible thing to do with your investments, because tax plays a big part in your overall returns. But you need to make sure you don’t let the tax tail wag the investment dog. Often it is better to look at your investments without considering tax, then look at how to make that particular investment tax efficient.
An example of when people let the tail wag the dog, is when they opt for a tax free return of say 1%, over a return of 2% that you pay tax on. Another example is when somebody who should be taking more risk with their investments opts for a zero risk tax free product, instead of exploring their options which they can match to their appropriate risk, but may pay tax on.
When buying property, tax often plays a big part in decisions. The cliff edge stamp duty limits of £125,000, £250,000 and £500,000 are a big factor when potential buyers are looking at properties just above these values. After all, nobody wants to buy a house for £126,000 and pay the tax man 1%, when all they need to do is get another £1,000 knocked off and be able to buy the property tax free.
Another example of when tax comes into play, is for property investors. By using a mortgage to buy a property rather than buying it outright, you benefit from a tax reduction. You are able to offset the interest payments of your mortgage, from the rental income you receive. This is a good thing for the right person and scenario, but tax savings shouldn’t be the reason you opt for the biggest mortgage possible. You might be surprised, but many landlords would rather pay £5,000 in mortgage interest, so that they save £1,000 on their tax bill.
You shouldn’t always plan to be as tax efficient as possible, because that can cause more harm than good. I know we don’t like to think about ‘giving money to the tax man’, but in reality the tax man doesn’t keep our money, that’s just his job and the tax men and women are just normal people, not greedy people who are keeping all of our money.
Something for landlords to think about next time they try and avoid tax so much, that they would rather pay money out in interest. Tax goes towards paying for hospitals, schools, provides jobs for the public sector, pays for our policing, national defence, roads and environmental protection. Interest on your mortgage goes towards the bank’s profits and helps pay for banker’s bonuses.
Now, I’m not saying stay away from mortgages either, but what you should do is plan for what works best for you, and don’t worry about where or who your money goes to. It is the end result for you that matters most.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde DipPFS
1st September 2014
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