By UK Property Investment Expert Andy Shaw...

Property Investment Question: How Can You Make Profit From Property Without Selling It?

This question might sound stupid, but how do you make profits from purchasing that houses since you told us to never sell a house. Do you mean the profit you got from renting the houses or did you sell the houses?

Hi Herman, nice to hear from you again, its not a stupid question at all. In fact the answer should be quite revealing. In fact you already know the answer you just don’t know what the implication is. You infact are probably already putting into practice the answer as I was before I realised what I was doing.

We all have seen Property Ladder, where they buy the house, do it up and if they get it right sell it for a considerable profit.

What you don’t get to see is the tax bill that’s associated with that, chances are after they have taken off their personal capital tax gains allowance they will have to pay 40% on the rest. Not such a considerable gain any more!

Wouldn’t it be nice to be able to take all of the profit you would have made by selling and not pay tax on it?

Let’s say you bought a property for £60k spent £10k on it, it owes you £70k including all costs to date. You now try selling it for £100k. You put it on the market and eventually you accept an offer of £93k. A pre-tax gain of £23k, or is it? You’ve lost obviously all of the rent you will have got in the 6 months it took to sell and complete, lets call that £3k. You’ve then got your agents fees, lets say 1.5%, so £1.4k. So you have made a gain of £18.7k. Well done you’re up!

Now the taxman has his bit. In theory, capital gains tax (CGT) is a fairly simple concept. Technically, it’s your proceeds less any costs and after your annual CGT allowance of £8,500. Anything left over is taxed at 20% for basic-rate taxpayers and 40% for higher-rate taxpayers. For example, if you have a capital gain of £10,000 and subtract your allowance, you are liable for tax on a gain of £1,500.

I want to make it clear at this point that when I used to work for myself as a sub-contractor and in my old businesses, I resented every penny I paid the taxman. I thought stupid things like, ‘I’m employing over 100 people and paying National Insurance contributions for all of them, I shouldn’t have to pay tax as well!’. See I told you it was stupid! The problem is for some reason I seemed to assume the taxman was after all he could get and I should hate him for it.

But it’s so not true, I think we are lucky to live in a country that is so safe and free. I think the surroundings I live in are great and the village I live in is really nice. Every year there are things done to the village to improve its looks and what we pay in council tax, some is used to improve the standards for everyone. I pay top rate council tax and it doesn’t bother me any longer.

As for income tax I want to pay my share, I want to take advantage of every tax break I can, so that I can create more wealth with the money I save, then in time I will pay tax on that. I am happy to be a UK resident and a tax payer.

Sorry went off on one there, but just got a little fed up with all the negativity towards paying what’s due.

Back to the point: -
So £18.7k - £8.5k = £10.2k less tax at your rate say 40% =£6.1k. So out of your £18.7k you get £14.6k.

Still that’s not so bad if your only doing 1 property / year, but if you’re doing 2 or more then you’d end up with £11.2k.

That’s it, you’ve made your money, you walk away and you go on to another property feeling good about the fact that you succeeded, safe because ignorance is bliss!

Lets look at it another way,

You decide to refinance.

The property still owes you £70k.

The properties worth £100k but you instruct a valuation for £110k, the val comes back at £105k and the lender will loan you 85% of that £89.3k. You re-mortgage it and collect £19.3k (less val & solicitors). You don’t loose £3k with no rent coming in, you don’t pay an estate agent and you end up with £19.3k instead of £14.6k or worse £11.2k.

You pay the taxman what you owe for this money… errr nothing!

Remember this is borrowed money and there’s no tax on that ‘yet!’

And then you spend your ‘profits’ on what you want.

There it is the legal way around tax, the taxman will get it in the end, when you die or if you sell, but you get it now tax-free.

Ok were going to get a bit technical now
Person 1 earns £25k / year their take home is £22k
Person 2 earns £50k / year their take home is £38k
Person 3 earns £100k / year their take home is £68k
(approx figs as I am no accountant!)

We will assume property capital appreciation at 8%, not the actual rate for the last 35 years 11.74%

This is to show how much investment property is required to cover their take home pay.

Person 1 needs to own £275k worth of Investment property to be able to withdraw £22k / anum from it.

Person 2 needs to own £480k worth of Investment property to be able to withdraw £38k / anum from it.

Person 1 needs to own £855k worth of Investment property to be able to withdraw £68k / anum from it.

Very Important: You can’t bank on this on a yearly basis, this is over time and some years you won’t get a pound, but others, you’ll be able to have more. If you hold onto that property over 7 years you will be able to take more from it.

Of course if you’d taken your profit and sold then you’d have nothing for the 7 years except regret.

There it is, told you, you already knew it, you, just didn’t know it was there.

Now the financial benefit is obvious, but it seems too easy! Surely if this was the case why isn’t everyone doing it? Well virtually all property investors are.

This is 1 of the secrets to real wealth.

All you have to do is buy property and wait. Lets say you screw it up and buy the wrong property. If you can’t sell then wait and it will all be sorted out for you by time.

The secret is to never sell.

There are times that you need to sell, because you bought the wrong property, the area’s gone downhill, your strategy has changed, whatever it is that’s ok. But you must replenish your stock straight away, don’t think you’ll do it next year do it now. Set yourself a goal to add just 1 property a year to your portfolio and you will be financially free within 10 years.

To finish off your question, no I did not sell my properties, they are still there and the portfolio grows significantly every year and always will!

One Day I just realised that as I owned two million pounds worth of property then I was making over £13k / month from capital growth. Of course this was a long time ago, when I had just started. This is what really inspired me to go and just keep buying.

Thanks again for the question, hope I didn’t get too much on my soap box there.

Kind regards

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