EXPLAINED: TAX AND THE BRRR STRATEGY

Tax advisor Paul Weller of Astonia Associates looks at the tax implications of the popular buy refurb refinance strategy

The BRRR model can be a very lucrative property strategy if executed properly and can provide infinite rental profits into the future.

As with all property projects though you need to get your ducks in a row first.

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Here I am going to introduce the tax ramifications of the BRRR strategy but, as always, get sound tax advice at the outset and also ensure that your mortgage broker understands what you are trying to achieve.

NO SALE, NO ISSUE

The BRRR strategy generally calls for the use of a bridging finance facility to purchase the property and then migrate to a conventional mortgage once the refurbishment is complete. Alternatively, you may have the cash to self-finance the purchase and the refurbishment costs yourself therefore saving any finance costs.

The idea is that you purchase the property, undergo refurbishment and then re-mortgage on the higher value of the property in order to extract as much cash as possible.

The re-mortgage provides cash to settle the bridging finance and you take out the cash balance to allow you to repeat the process on the next property.

Because you are retaining the property to rent to tenants, you have not disposed of (sold) the property therefore there are no company or personal taxes to pay on any sale at the moment. Eventual sale and rental profits are however taxable.

CAN I CLAIM IT?

With any property refurbishment project, it is very important to understand how the refurbishment costs you incur are treated for tax purposes.

Generally speaking, as this area can get complicated, costs are split into two categories – Revenue Costs and Capital Costs.

You can receive tax relief on revenue costs in the year the expenditure incurred, meaning that you can achieve tax relief quickly. Examples are repairs and maintenance, replacement of items on a ‘like for like’ basis, general painting and decorating.

Capital costs are of a more permanent nature such as extensions, new en-suites, the addition of conservatories etc. These costs still attract tax relief, but only when the property is sold.

FAIR ADVANTAGE

Occasionally, savvy investors will find that unicorn deal where they are able to not only refinance all of their cash back of a deal after the renovation has been completed but they actually get out more money than they put in.

It takes serious hard work to not only find such a deal but to manage the work and get it across the line, so I am happy to report that the money that you get back out of such a deal in the way of refinance cash can be tax free if you retain the property and rent it out. There are certain rules to this and you need to obtain professional advice on your own circumstances.

If you then put that extra cash released to work in the next property deal it should be pretty self-evident how you can achieve significant portfolio scale.

If the BRRR model forms part of your overall investment portfolio then a group structure may also be beneficial whereby properties, cash and profits may be able to be moved around the group in very tax efficient ways. Again, you need to seek professional advice.

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