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Tax


Tax is an aspect of Residential Property Investment which is often overlooked. There are many twists and turns to consider at all levels, whether  it be for Income Tax, Capital Gains Tax or Inheritance Tax, and it is important to get the structure of ownership right and to make sure that all tax relief, allowances and claims are made.

This section summarises some of the main aspects of the principal areas of Property tax. There are many detailed aspects to consider at each stage, and it is very important to obtain good professional advice if you have any doubts as to the applicability of any rule. The tax implications for commercial property are, in many instances, very different and have not been addressed here.

All areas of tax require you to practice good record keeping (this is equally applicable when you sell a property). It is essential that you keep full and accurate records of all income and expenditure, perhaps maintaining a separate bank account for these, so that you can be sure that you have all of the ammunition to allow you to claim the maximum deductions and thereby pay the minimum amount of tax.

>> Income tax

If you are a new property investor you should promptly notify HM Revenue & Customs (HMRC) of the new source of income which you are now receiving. The tax is computed through the annual Tax Return sent to HMRC.

Income Tax is payable on profits made from the property renting business by computing the total of rents receivable less expenses. Tenants’ deposits do not count as income. However deposits need protecting with an authorised scheme. [See section 2.3 Deposit protection schemes]

Typical expenses which can be deducted include:
• repairs and maintenance (though not initial expenditure needed to bring the property up to a letting standard, or improvements);
• gardening
• cleaning
• ground rents
• service charges
• contents and building Insurance
• managing agent’s fees
• legal fees for tenancy agreements
• advertising
• HMO licence costs
• interest (not the capital repayments) on loans used to buy or improve the property
• water rates
• council tax
• heating and lighting
• security
• accountancy fees
• motor and travelling expenses for visiting the property and for attending to matters relating to let properties.

This list is not exhaustive and can vary in individual circumstances.

A special wear and tear allowance of approximately
10 per cent of the rents received can be claimed if the property is let fully furnished.

A special tax allowance exists if the landlord undertakes certain improvements to the property to increase energy efficiency, known as the Landlords’ Energy Saving Allowance (LESA).

On the question of repairs and maintenance, it is important to distinguish between items of repair, and items of improvement. Redecorating rooms, changing windows from single to double-glazing, or replacing
a defective roof, are examples of repairs which will be allowable. The addition of another floor to the building, or a new conservatory, would not qualify, and tax relief would only be received on the eventual sale of the property, being set against the eventual Capital Gain.

>> Ownership

Where properties are owned in joint names, then the profits can be shared between the joint owners or, in certain circumstances, can be wholly attributable to one or other of the joint owners.

Where a husband and wife own a property jointly, the income is automatically assessed equally, even if the actual ownership proportion  is not equal, unless they elect otherwise.

For Capital Gains Tax purposes, the proportionate ownership is important, and any Capital Gain would be shared between the joint owners in their respective proportions thus giving rise to multiple tax-free allowances.

In certain circumstances, it may be worthwhile for a Limited Company to be brought into the structure. It is normally sensible for the properties themselves to be held in individual or joint names, but these can be sub-let to a company who then let out the properties to the ultimate tenants. In this way, the let income from the property is taxed at the lower rate of Corporation Tax, thus leaving more for the ultimate owners.

>> Capital gains tax

Capital Gains Tax (CGT) is a tax on the gain or profit made when shares or property are sold, given away or otherwise disposed of. There is a tax-free allowance and some additional reliefs that can reduce a Capital Gains Tax bill.

The profit or ‘gain’ on which tax is levied is calculated by taking the final price received for the property when it is sold (after deducting legal costs and agent’s fees), compared with what the property cost initially (including and legal fees and Stamp Duty).

There are then potential deductions and tax relief available including:
• The cost of any improvements to the property whilst under ownership can be deducted (but not the cost of repairs which has previously been set off against Income Tax)
• If the property has been occupied by the owner as an owner-occupier at any time, then there are two additional very valuable reliefs:
- Lettings relief whereby up to a certain amount of any gain per owner can be tax relief
- A proportionate principal private residence relief
• If the property was owned on March 1982 its value at that date is substituted for the original cost of the property in calculating the ultimate gain.
• There is a set value tax free allowance in a single tax year, tax is only charged on any gain above that value.

>> Inheritance tax

Where a property is owned at date of death, the value of that property forms part of your Estate and is potentially liable to Inheritance Tax (IHT). If the property is left to your spouse in your Will, then no IHT would be payable until the death of your spouse.

There are ways of reducing the IHT liability. If properties are held in joint names (as tenants-in-common rather than joint tenants) from the outset, then only a proportion of the value of the property will fall into your Estate. And because you do not own all of the property, a discount can be applied to the proportionate value, thus reducing the IHT even further.  A tax efficient will should be drawn up to ensure maximum use of IHT allowances.

For further information about tax see www.hmrc.gov.uk

 

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