It is important to understand the distinction between Capital and Revenue, both for receipts and for expenses.

There have been numerous tax cases on this issue, and the distinction can be very difficult in the “grey areas” between the two, but as far as the typical property letting business is concerned, the path is quite well-trodden, and there are some clear distinctions to be made.

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If you take out a personal loan that is used ‘wholly and exclusively’ for the purpose of the property, then the interest charged on this loan can also be offset.

A loan used for providing a deposit is one scenario in which the interest charged on a personal loan can be offset against the property income.
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You should be thinking about your proposed exit route from the first day you start your business, as it may affect how you set it up and the strategic decisions you make as time goes on.

Everybody Has an Exit Strategy

Some businessmen say they have no exit route – they will work till they drop, and leave the business to their children – but that is itself an exit route.

The THREE Most Common Exit Strategies…

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HMRC have the power to “enquire” into any tax return from a company, a partnership, or an individual. They do not have to give a reason for the enquiry.

Here are the four golden rules for dealing with tax enquiries:

• DON’T try to handle it yourself – get advice before you reply to the initial letter from the inspector, and at all costs DON’T ring the inspector up to “have a chat and sort this out.”

• DON’T ignore it and hope it will go away – remember the mitigation of penalties for co-operation and disclosure

• DO be honest and upfront with your Tax Adviser – only then will he be able to help you

• DO talk to your accountant about taking out insurance to cover the fees for a tax investigation – the professional fees can be very expensive

Note – The 2007 Budget announced changes to the penalty regime for tax investigations. These are being implemented for the 2008/09 tax year, and the penalties under the new rules will be significantly higher than under the present regime.

We all instinctively do some tax planning in our daily lives, even if it is simply remembering to buy our “duty frees” when we return from our holiday abroad.

If you are going to make the best of your property business, then you need to be alert to the tax implications of your business plans and to any opportunities to reduce the likely tax bill. Your instinct may be enough for your duty free goodies, but for tax on your business, you need a more structured approach!

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