Personal
Tax
Buy
to Let Properties
In
recent years, the stock market has not proved to be a successful
investment. Add to this the serious loss of public confidence
in pension funds as a means of saving for the future and it
is not surprising that investors have looked elsewhere.
The UK property market, whilst cyclical, has proved over the
long-term to be a very successful investment. This has resulted
in a massive expansion in the buy to let sector.
Buy to let involves investing in property with the expectation
of capital growth with the rental income from tenants covering
the mortgage costs and any outgoings.
Currently, gross returns from such properties - ie the rent
received taking account of the costs of letting such as management
fees, maintenance, service charges and insurance varies between
7% and 10%. Add to this the fact that capital appreciation
is likely to exceed inflation for the foreseeable future and
the attraction is obvious. However, investors should take
a long-term view and choose properties with care.
Factors
to Consider
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Do
- think
of your investment as medium to long-term
- research
the local market
- do
your sums carefully
- consider
decorating to a high standard to attract tenants quickly.
Don’t
- purchase
anything with serious maintenance problems
- think
that friends and relatives can look after the letting
for you - you’re probably better off with a full
management service
- cut
corners with tenancy agreements and other legal documentation.
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Which
Property?
Investing
in a buy to let property is not the same as buying your own
home. You may wish to get an agent to advise you of the local
market for rented property. Is there a demand for say, two
bedroom flats or four bedroom houses or properties close to
schools or transport links? An agent will also be able to
advise you of the standard of decoration and furnishings which
are expected to get a quick let.
Agents
Letting
property can be very time consuming and inconvenient. Tenants
will expect a quick solution if the central heating breaks
down over the bank holiday weekend! Also do you want to advertise
the property yourself and show around prospective tenants?
An agent will be able to deal with all of this for you.
Tenancy
Agreements
This
important document will ensure that the legal position is
clear.
Taxation
When
buying to let, taxation aspects must be considered.
Tax
on Rental Income
Income
tax will be payable on the rents received after deducting
allowable expenses. Allowable expenses include mortgage interest,
repairs, agent’s letting fees and an allowance for furnishings.
Tax
on Sale
Capital
gains tax (CGT) will be payable on the eventual sale of the
property. The tax will be charged on the disposal proceeds
less the original cost of the property, certain legal costs
and any capital improvements made to the property. This profit
on disposal will be reduced by taper relief where you have
owned the property for at least three years. Taper relief
starts at 5% of the gain increasing to a maximum of 40% after
10 years ownership.
Student
Lettings
Buy
to let may make sense if you have children at college or university.
It is important that the arrangement is structured correctly.
The student should purchase the property (with the parent
acting as guarantor on the mortgage). There are several advantages
to this arrangement.
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Advantages
- This
is a cost effective way of providing your child with
somewhere decent to live.
- Rental
income on letting spare rooms to other students should
be sufficient to cover the mortgage repayments.
- The
income tax payable on the rental income is subject
to a tax deduction known as ‘rent a room relief’
of £4,250 each year.
- As
long as the property is the child’s only property
it should be exempt from CGT on its eventual sale
as it will be regarded as their main residence.
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Furnished
Holiday Lettings
Furnished
holiday letting is another type of investment that could be
considered. This form of letting is short holiday lets as
opposed to letting for the residential market. It has some
advantages but it has other disadvantages which should also
be considered.
Advantages
You may want to take a holiday in your own property, or make
it available some of the time to your family or friends. Care
would need to be taken to adjust the level of expenses claimed
to reflect this private use.
Generally however the rules for allowable expenditure are
more generous.
The income is regarded as ‘trading income’ for tax
purposes and is treated as earnings for pension contribution
purposes.
The more attractive rates of business asset taper relief will
be available against the capital gain on the eventual sale
of the property. One year’s ownership would attract 50%
taper relief and two years ownership 75%.
Disadvantages
Holiday letting will have higher agent’s fees, advertising
costs, and maintenance fees.
Owning a holiday property may be more time consuming than
you think and you may find yourself spending your precious
holiday sorting out problems.
How
We Can Help
Whilst
some generalisations can be made about buy to let properties
it is always necessary to tailor any advice to your personal
situation. Any plan must take into account your circumstances
and aspirations.
Whilst a successful buy to let cannot be guaranteed, professional
advice can help to sort out some of the potential problems
and structure the investment correctly.
We would be happy to discuss buy to let further with you.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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C o m p l e t
e 
Regulated
to carry on audit work for a range of investment business
activities by the Institute of Chartered Accountants in England
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