With property investment, there are two ways to get cash from the equity:
- Sell (liquidate the asset)
- Borrow (against the asset)
If you sell, you lose:
- immediate cash in CGT, or Corporation Tax (CT) if the property is owned by a limited company
- future earnings from the asset (i.e. rental profits)
If you borrow against the asset, you have:
- no upfront tax to pay
- tax-deductible cash (mortgage interest)
- continuous future earnings from the asset
So, when do you pay tax on the gain?
- When you sell a property, so that you can spend the money you’ve made from it
CGT is still less than the higher-rate tax band. Suck it up! - You can wait til you’re retired, sell when you’re in your senior years, and pay tax then
At that time of life, you no longer need to generate cash for your long-term future. Instead, you’re using cash for short-term (and final 😓) needs, such as care and living expenses. - Death
At this point, someone will pay inheritance tax but it won’t be you! 🤣 The gain has to be taxed at some point. Why not when someone receives something for nothing? Something is still better than nothing. Whatever you leave is a bonus.
How can you avoid paying tax on your gain?
- Charitable donations
Whatever you give away to charity is deducted from your taxable amount. Plus, you get to enjoy the feeling of having given it all away. This is the ‘selfless way’ to spend your money, while still being wholly selfish (as Phoebe Buffay said, ‘there is no selfless good deed’) - Do what Chuck Feeney did – give it all away while you’re still alive & kicking!
This is certainly my plan. Everything above ‘enough’ is to be put to charitable use. It’s a win for me; a win for the good cause; and a win for the planet (less consumption). Funnily enough, the only loser is the tax man; however, if your charitable works ease the strain on the public coffers then that’s a win too!
In my experience, people who complain the loudest about paying tax are usually
- the ones who also complain the loudest about lack of public sector facilities (why do you think that is?)
- those who can’t pay tax (because they’re stuck in poverty, due to a lack of education, opportunities, training etc)
- everyone else! As Charlie Munger said, ‘envy is the most pointless vice’
Remember that paying tax is a privilege. There are people who would love to be able to pay tax, because that would mean they were earning. Every pound you pay, think of the people who would love to be that prosperous, and it might ease the pain of settling your tax bill.
On that note, far from avoiding paying my dues, I choose to pay more tax than I need to. Here’s a post about why I do that, and how paying more tax can improve your success as a property investor.
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This video talks you through how to benefit from the equity in your properties without selling.
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