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18th September 2019

Do I Want a Property Investment or Property Business?

A property investment or a property business.

What is the difference?

Does it make more sense to have a property investment or a property business?

You’re interested in getting into property – but how should it be structured?

property investment or property business

Traditionally the buying of property for rental income and capital growth has been regarded as an investment, and this is the view shared by HMRC when it comes to taxing the profits. The reason for this is that property owning was seen as a ‘passive’ investment with landlords taking a hands-off approach.

Many investors still follow this traditional route; for them their investments are ‘in the background’ with the day-to-day activity managed by letting agents on their behalf.

But there are a rising number of ‘hands on’ investors who take a more sophisticated approach to the ownership and management of their portfolios. For them, property is a business.

When it comes to deciding whether to have a property investment or a property business, it’s worth noting that each approach is equally valid and will suit different objectives.

Property Investment vs Property Business – the key points

From a tax point of view it only makes a difference in a limited number of circumstances, such as claiming capital gains tax relief on incorporating your property portfolio (putting it into a limited company) – not something you need to worry about day to day, if ever. Generally, the tax rules are:

  • If you hold the property in your personal name, profits from rents will be taxed as income, while profits on selling the assets will be taxed as capital gains
  • If you hold the property in a company, all the profits will be taxed at corporation tax rates

So what does it matter then if it’s a business or not?

The answer comes down to attitude and how you perceive your activities, as well as the type of strategy you adopt. Whether you run the business through a limited company doesn’t really matter. However the biggest factor will be the amount of time you dedicate to running your portfolio – if it’s largely a full time job, then the chances are you will already be thinking of it as a business.

Three key elements of any successful business are:

  1. Knowing your market – who your customers are and what they need
  2. Operate a system – if you find something that works, keep doing it (and hopefully improve)
  3. Know your numbers – we will have a look at this in more detail.

Understanding the financials of your property business can be looked at in the following stages:

  1. Before – does the deal stack up?
  2. During – cash flow management and tax
  3. After – the end game

The majority of investors will concentrate heavily on 1, have an idea of what they want at 3, but running the finances on a day to day basis is often overlooked or given less emphasis than it deserves. This is easily done when the day to day management of the portfolio takes up time and effort, but getting to grips with your numbers will help you to:

  • Identify which parts of your portfolio are making a good return on your investment
  • Highlight properties that are showing strong cash-flow (as opposed to capital growth)
  • Spot defaulters or slow payers more easily
  • Plan for further capital investment – such as releasing funds from your property stock
  • Factor in tax payments

Getting a better understanding of the finances will also help with your overall business plan, which will in turn help you to identify which projects to go for and which to pass over. With the end game in mind, you will be able to understand better the type and number of investments you need to reach your final destination.

Clarity is paramount at each stage.

Having good financial reporting systems is crucial to effective management of your property business.

Have you got questions? Ask our friendly team – we’d be happy to advise you.

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