The UK property rental market has continued to grow in recent years due to strong investment in the buy-to-let market, coupled with a relaxation of people’s attitude to renting. Add to this the low interest rate environment we have all enjoyed and there are strong incentives to jump on the property bandwagon.
However, before doing so, it is worth bearing in mind the short and long term tax implications in order to ensure that maximum benefit is derived from ownership of the property.
Any profits from letting a property are added to the taxpayer’s income and taxed at their highest rate. The tax is collected via the self assessment system, so, if you are not currently required to submit a self assessment tax return then you should notify HMRC of the new source of income as soon as practicable and arrange for the relevant tax return forms to be sent to you.
22 May 2015 | Written by Richard A Crofts, Director
Helping local businesses to grow and pay less tax | Small enough to care
Buy To Let Tax Implications & Tips
Tax is then charged either at 18% or 28% depending on other income levels.
Here are our 3 top tips to mitigate the tax position:
| Selling Price |
£175,000 |
| Less costs of sale (Agents fees, legal fees etc) |
(£5,000) |
| Net sale price | £170,000 |
| Less purchase price |
(£95,000) |
| Less Costs of purchase (Stamp duty, Legal fees, survey fees etc) | (£5,000) |
| Chargeable gain |
£70,000 |
| Less annual exemption 2014/15 (assuming no other gains) |
(£11,000) |
| Taxable gain |
£59,000 |
The taxable profits from letting a property are determined by deducting a variety of expenses from the rents receivable. Typical expenses that can be deducted include repairs, maintenance, gardening, letting agent’s commission, insurance and the interest element of the mortgage repayment. It is worth emphasising that the capital element of the mortgage payment is not an allowable expense, as in my experience this is often overlooked by new investors. If the property is let ‘fully furnished’, a further wear and tear allowance is available equivalent to 10% of the rent.
On the eventual disposal of the property Capital Gains Tax is payable on any profit. The profit for tax purposes is calculated by deducting the original purchase price from the sale proceeds. The following example illustrates how the taxable profit is arrived at:
Place the property in joint ownership with a spouse or partner. If the spouse or partner pays tax at a lower rate or no tax at all then a significant saving in income tax can be achieved on their share of the profits. Furthermore, on the eventual sale of the property the spouse or partner will be able to use their annual exemption (£11,000 2014/15) to reduce the taxable gain. In the above example this would save £3,080 (£11,000 @ 28%).
If you can show that you lived in the property as your principal private residence, even briefly, at some point during ownership, then you would be entitled to claim PPR relief. 18 months of ownership are then exempt in calculating Capital Gains Tax, whether the individual is living there at the time of selling or not.
So, let’s assume the taxpayer and his wife owned the rental property for 10 years and never lived in it, having paid £100,000 for the property. If they sold it for £200,000 they would have made a gain for tax purposes of £100,000. However, if they could prove that the property is/was their Principal Private Residence, even if it was only for 3 months (there is no stated minimum), they could claim 18 months of PPR relief. 18 months PPR relief on 10 years of ownership would reduce the capital gain by £15,000 to £85,000.
In addition, they could also claim ‘Lettings Relief’ at the same amount or £40,000, whichever is the lower, which in this case would be a further £15,000 reduction. It doesn’t end there; the bonus with lettings relief is that each person can claim it, so in this example the taxpayer and his wife could each claim £15,000 lettings relief, bringing the total taxable gain (profit) down to £55,000. With 2 x annual exemptions this would reduce a £100,000 taxable gain to just £33,000.
At 28% this represents a tax saving of £18,760.
So, let’s assume the taxpayer and his wife owned the rental property for 10 years and never lived in it, having paid £100,000 for the property. If they sold it for £200,000 they would have made a gain for tax purposes of £100,000. However, if they could prove that the property is/was their Principal Private Residence, even if it was only for 3 months (there is no stated minimum), they could claim 18 months of PPR relief. 18 months PPR relief on 10 years of ownership would reduce the capital gain by £15,000 to £85,000.
In addition, they could also claim ‘Lettings Relief’ at the same amount or £40,000, whichever is the lower, which in this case would be a further £15,000 reduction. It doesn’t end there; the bonus with lettings relief is that each person can claim it, so in this example the taxpayer and his wife could each claim £15,000 lettings relief, bringing the total taxable gain (profit) down to £55,000. With 2 x annual exemptions this would reduce a £100,000 taxable gain to just £33,000.
At 28% this represents a tax saving of £18,760.
If the property is to be sold towards the end of a tax year (5th April) then by delaying the sale possibly by only a few days into the following tax year the tax payment date can be delayed by a full year.
The tax implications of any investment have a significant impact upon the eventual profitability of the investment and professional advice should always be obtained which is tailored to your personal circumstances.
