If you’re a medical professional looking to expand your practice, you may be considering buying more rooms. While this can provide you with many benefits, it’s not a decision to be taken lightly. There are significant tax implications you must be aware of when you make your decision. Here are three of them:
The first tax implication you may want to consider is income tax. How will buying a room impact how much you can expect to pay?
The answer to this question depends upon how you intend to use the room. Will you be renting it out to other professionals when you are not using it?
If so, you must pay tax on any income you make from doing so, which would increase your tax liability in line with profit.
However, this also comes with benefits. If you’re making an income from your room, one crucial tax implication is that you become eligible for tax deductions associated with the room. Anything you need to spend on maintenance becomes a valid business expense, and you can use it to reduce your tax position at the end of the financial year.
One key tax implication for investment properties is depreciation. Over time, the value of your room will likely depreciate — and you can also use this to offset your taxable income from the room. How much you can claim depends on a wide range of factors, so it’s advisable to seek advice from an accountant when doing this.
Properties depreciate at different rates according to the type of property and the relevant fixtures and fittings — and there are no concrete rules to guide you through the process. Instead, it requires expert judgement, taking into consideration both structural and material depreciations.
Have you already purchased your room, but this is the first you’re hearing about depreciation? The good news is we can backdate this tax implication to make sure you receive the full benefit.
Do you plan to sell your room for a profit when it’s served its purpose? Don’t forget to think about capital gains tax (CGT) when considering the associated tax implications.
Capital gain is what happens when you sell your room for a profit. Conversely, properties that make a loss are subject to capital losses.
If you profit from your sale — a capital gain — you will be subject to capital gains tax.
One of the most important things to consider when thinking about this tax implication is that capital gains tax isn’t based exclusively on the amount you paid for your room. You should also include anything you’ve spent on renovating it or ensuring it’s fit for purpose.
This calculation will provide a more accurate depiction of the actual profit from the sale, and help offset the amount of CGT you will need to pay.
But what happens if you make a loss? In this scenario, you can use the sale of your room (and the associated loss) to offset a future capital gain. This tax rule can be useful if you have sold a place due to problems, at a loss, before moving to a new location for your practice. Making a loss is always disheartening, but you can be at ease knowing the loss will help minimise any capital gains tax implications of the future.