The forecast by the Council of Mortgage Lenders is for BTL to grow to 13 per cent in 2007 so make sure you don’t miss the opportunity to increase your business.
This month I wish to focus on tax and some of the considerations a landlord should be aware of when entering the market. This is, of course, generic information and not advice – you must ensure a landlord seeks independent taxation advice through a qualified accountant to ensure that their affairs are structured in the most beneficial way. This information is designed to give you an understanding of these considerations.
Investment strategy
When setting out to build a portfolio a landlord should firstly give consideration to how and when they are considering selling their portfolio – an exit strategy. Consideration must be given to inheritance and capital gains tax planning and how they can utilise the various tax breaks to minimise tax on the sale of property. This is, of course, vital to ensuring that the capital gains made are not eroded by tax. It’s important that a will is in place and all new properties are mentioned in it, which could avoid issues if the landlord dies before their plans are fulfilled.
Owning the property
A landlord should consider whether the purchase should be made in his or her own name or include a spouse or partner. This should be done at the outset to avoid having to make changes to ownership later on. Purchasing the property as joint tenants this means the rental income must be split between parties, potentially taking advantage of each party’s allowances. If a decision is made to have different shares in the property, this would be deemed as tenants in common. By owning a property in joint names, this allows use of each person’s capital gains tax allowance on sale of the property, therefore potentially maximising any profits.
Capital gains tax
For the 2006/7 tax year the capital gains tax allowance is £8,800. A jointly owned asset would, therefore, mean it would need a chargeable gain of £17,600 before capital gains tax becomes payable. The rate of capital gains tax payable depends upon the landlords taxable income.There are tax breaks available against capital gains tax, which could include:
c Principal private residence relief – an exemption can be claimed on the time the landlord may have lived in the property as a main residence, together with the last 36 months of ownership whether they lived in the property or not.
c Taper relief – after three years of ownership, taper relief can be applied at 5 per cent increments, reducing taxable gains by up to 40 per cent over a 10-year period.
c Inflation – this relief is only available if the property was purchased before 1998 by calculating how inflation has increased its value.
c Letting exemption – a private residence relief lettings exemption up to £40,000 may be possible.
Bank accounts
It’s important for the landlord to have separate bank accounts to record rental income received and expenditure incurred. This makes it much easier to complete annual tax returns and keep track of your investment.
Allowable expenses
A landlord can offset allowable expenses against income tax provided that they are incurred exclusively and wholly in generating rental income:
c Legal and accountancy fees – legal fees in respect of ongoing tenancies and accountancy fees providing they relate to the properties being let.
c Mortgage interest – tax relief can usually be claimed on interest payments on mortgages on the let property together with loan interest on repairs where applicable, providing the property is let for more than 26 weeks. This is why it’s important to have a BTL mortgage, as interest from the mortgage on the landlord’s main residence cannot be offset, apart from that used for deposit or purchase of BTL property.
c Letting charges – the landlord could claim tax relief on any letting or management fees.
c Adverts – the cost of advertising for tenants is an allowable expense.
c Wear and tear – if the property is furnished a landlord can claim on all furnishings at 10 per cent of the rental income for the year.
c Insurance – all policies taken out in connection with the property.
c Service charge – if this is paid by the landlord then it can be offset.
c Property inspection – costs incurred to visit the property providing they are appropriate.
Income tax
All rental income must be declared to the Inland Revenue each year. If all income is greater than allowable expenses the difference is added to the landlord’s taxable income for the relevant tax rate to be determined. It’s important that landlords keep precise records of mortgages held, payments, income and allowable expenditure to validate their Inland Revenue return.
Tax is a complicated matter and it is essential that professional advice is sought by the landlord.
Alex Murray looks at the issue of tax on buy-to-let investors and landlords
