Property investments and hidden costs
By Alex Carroll
At LIFT-Sport, we often encounter clients who view property as their primary investment strategy, citing impressive returns. However, the actual returns and costs associated with property investments can be complex and are sometimes misunderstood.
‘I made £125,000 on a property in just 12 months’
Let’s examine a hypothetical scenario:
A client purchases a property for £500,000 within a Limited Company structure and sells it 12 months later for £625,000. At first glance, this appears to be a £125,000 profit, or a 25% return.
However, a closer look at the costs involved presents a different picture:
➡ Stamp Duty on purchase (at the additional rate): £27,500
➡ Mortgage interest used to finance the purchase with a £100,000 deposit (5% on £400,000): £20,000
➡ Renovation costs: £50,000
➡ Legal fees (on purchase and sale): £3,000
➡ Estate agent fees (0.90% on sale): £5,625
➡ Accountancy fees to run the Limited Company: £1,000
➡ Corporation Tax (25%) on the profit less expenses (£125,000 less renovation costs of £50,000, legal fees on purchase and sale of £3,000, stamp duty on purchase of £27,500 and estate agent fees of £5,625 = £38,875): £9,719.
Total costs: £116,844
This leaves a net profit of £8,156 or just under a 2% return on the property’s initial value. This doesn’t account for potential dividend tax or income tax if the funds are withdrawn from the company (potentially 38.1% or 45% if an additional rate taxpayer).
Key takeaways:
🔸 Property investments often involve significant costs that can substantially reduce profits.
🔸 Recent changes in government regulations and taxation have impacted the efficiency of property investments, even within Limited Company structures.
🔸 It’s crucial to thoroughly understand and account for all costs when evaluating property investments.
At LIFT-Sport, we aim to help our clients make informed decisions about their investment strategies, including property investments. We encourage a comprehensive approach that considers all aspects of an investment, including potential returns, associated costs, and tax implications.
Remember, this example is simplified and hypothetical. Real estate markets can be volatile, and returns can vary significantly. Property investment, like any investment, carries risks and may not be suitable for everyone.
For personalised advice on investment strategies, including property investments, please consult with a qualified financial adviser who can consider your individual circumstances and goals.