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TAX CONSIDERATIONS

The ideal buy to let property gives the investor a steady income and the opportunity to benefit from the increase in value of a solid asset.  The taxman has an interest in both parts of that equation.

The Inland Revenue treats income from most letting properties as investment income.  This means that such properties are not treated as Ďbusiness assetsí and are disqualified from the taper relief for Capital Gains Tax purposes.  An exception applies to furnished holiday lettings where separate rules apply.  There are also separate rules if you let out rooms in your own house.

So what allowances can be claimed for a standard let of a furnished property? The major revenue expenses of loan interest, insurance and agentís fees are allowable against tax.  Repairs are also allowable as long as they do not relate to the improvement of the capital element of the investment.  The initial refurbishment of a property prior to the first let would not be allowable.

The wear and tear of furniture and fittings can be relieved in one of two ways.  You can opt to claim the replacement cost of an asset after it has worn out.  Letís consider the cost of a suite and some carpets.  The initial cost does not attract any allowances.  But after a few years when the items are replaced, you can claim that against tax.

The alternative is to elect to claim a wear and tear allowance of 10% of the rental.  If the rent includes charges that would normally be borne by the tenant, such as council tax, then the allowable rent is reduced by that amount.

On disposal of the property, the general rule is that capital gains are subject to Capital Gains Tax.  It is difficult to reduce that charge, other than to move into the property yourself and establish it as your principal private residence.  If that is a practical proposition, look into it carefully and make sure that the move cannot be challenged.


WARNING

These are the major basic tax facts that effect buy-to-let landlords.

Please note that tax is a very complicated subject. Always consult an accountant or tax professional to determine your own tax position.

Income tax

You are liable to pay income tax on the rental income you receive

Tax will be charged at your highest marginal rate of income tax - either 22 per cent or 40 per cent

There are a number of allowances you can offset against income tax

Take your rental income and deduct the following:
1. Interest payments on your buy-to-let mortgage ( but not capital repayments)
2. Mortgage arrangement costs
3. Maintenance costs (such as painting and decorating)
4. 10% a year depreciation of furniture value
5. Cleaning
6. Ground rent, service charges and buildings insurance, where applicable
7. Advertising the property
8. Letting agent's fees
9. Accountant's fees
10. Insurance policies on white goods, gas boilers, plumbing cover

Capital Gains Tax

When you come to sell the property, you will be liable for CGT, but only on the gain you have made

You have a personal CGT allowance of £7,700 a year. If your property is held in joint names with a spouse or partner, you can add your allowances together

Any net taxable gain in the year is added to your total income from other sources in the year to determine the tax band applicable.

If the property was formerly your main residence (ie your home), you are exempt from CGT if you sell within three years of it becoming a rental property

Where a gain is made on disposal of a property that has been a main residence at some point, but has also specifically been let as residential accommodation, then a further special relief is available. This exempts a gain of up to £40,000

If the property was never your main residence, you are liable for full CGT for the first three years. After that the proportion of tax charged is tapered for the next seven years. There is a reduction of 5% after three years increasing by 5% each year to a maximum of 40% of the gain, after 10 years. This equates to effective tax rates for higher tax payers of 24%, and base rate tax payers of 13.8%.

 

All material on this website is provided for information only, and is not intended to form part of any offer or contract. Our policies and practices may change at any time without notice. Details of properties are provided from information received, and their accuracy cannot be guaranteed

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