PROPERTY MATTERS
Direct investment in residential property has always been a popular form of investment. Buy to let The UK property market, whilst cyclical, has proved over the long term to be a successful investment. This has resulted in a massive expansion in the buy to let sector. Traditionally, 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. However the gross return from buy to let properties can change. Investors also need to take a view on the likelihood of capital appreciation exceeding inflation. Investors should take a long-term view and choose properties with care. Practical Tip When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the short and long term. An investment strategy based purely on saving tax is not appropriate. Devolution of Property Taxes Stamp Duty Land Tax (SDLT) applies in England and Northern Ireland, Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales.
Higher rates of SDLT, LBTT and LTT apply on purchases of additional residential properties. The rates are 3% above the SDLT rates, 6% above the LBTT rates and 4% above the LTT rates. There are some exemptions from the rules. One of these covers the replacement of a main residence within certain time limits. Please contact us for further advice on this area. Tax on rental income Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest on non-residential properties only, agent letting fees and the cost of replacing furnishings. A property allowance is available such that property income of £1,000 or less does not need to be reported to HMRC. Restriction of relief for finance costs on residential lettings The amount of income tax relief landlords can get on residential property finance costs is restricted to the basic rate of income tax. Relief is given by way of a tax reducer rather than the costs being deductible in full from the rental income. Property investment company Sometimes it may be preferable to operate the property investment business through a company. Clearly there will be non-tax issues to consider (as for ‘running a business’) but some of the key tax differences are:
• generally lower rates of corporation tax than income tax on rental profits • interest on loans to purchase the property will be deductible from profits in a company (rather than as a tax reducer for interest on residential property for individuals) • capital gains for companies are subject to corporation tax rather than CGT • no annual exempt amount for companies • extraction of funds from the company will often result in additional tax charges • additional taxes may be payable where residential properties worth more than £500,000 are held through a company. Renting a room There has been an increasing number of individuals seeking to generate income from their own home either by taking on a lodger or through ad-hoc lettings such as Airbnb or Vrbo. Rent a Room relief Income from letting a room within your main residence is property income. However, if gross rents for a tax year do not exceed £7,500, no income tax is payable. This relief is known as Rent a Room relief. If rents exceed £7,500, the taxpayer has a choice whether to deduct actual expenses or £7,500.
Property Matters
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