The next article in our Taxes Made Easy series discusses 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, the rent less expenses, 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.
Investing in a buy to let property is not the same as buying your own home. You may wish to get an agent to advise you of the local market for rented property. An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.
Letting property can be very time consuming and inconvenient. Tenants will expect a quick solution if the central heating breaks down over the bank holiday weekend! Do not cut corners - a correctly drawn up tenancy agreement will ensure the legal position is clear.
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 and LTT rates and 4% above the LBTT rates. The higher rates potentially apply if, at the end of the purchase transaction, the individual owns two or more residential properties.
There are some exemptions from the rules.One of these covers the replacement of a main residence within certain time limits.
Tax on rental income
Income tax will be payable on the rents received after deducting allowable expenses.
Allowable expenses include mortgage interest, which is restricted in the case of residential property, repairs, agent’s letting fees and the cost of replacing furnishings.
Restriction of relief for finance costs on residential lettings
The amount of income tax relief landlords can get on residential property finance costs is being restricted to the basic rate of income tax. This restriction is being phased in over four years from April 2017. For 2019/20, 25% of the finance costs are deductible in full from the rental income. The remaining 75% is given as a basic rate reduction. This reduction may be subject to further restrictions where property or other non-savings income is insufficient.
Where property is disposed of CGT will generally be payable. This is payable on the difference between the sale proceeds and the original cost. Where a property has been improved then these capital costs may be available to reducethe value of the gain. The CGT annual exemption results in the first £12,000 of gains, for 2019/20, being tax free.
CGT rates are generally 10% to the extent that any income tax basic rate band is available and 20% thereafter.
However these rates increase to 18% and 28% for chargeable gains on residential properties that do not qualify for private residence relief and some other situations.
An individual’s or married couple’s only or main residence is generally exempt from CGT. The exemption extends to grounds of up to half a hectare provided this is not used for any other purpose. There must also be clear evidence of occupation as a main residence and not just ownership.
Larger grounds may also be exempt, as can the sale of part of the garden or grounds for
development. However, professional advice is recommended to plan for the best outcome.
Subject to exceptions, periods of absence are chargeable but, if the main residence was let during absences, as a result of which a charge arises, a ‘letting relief’ may apply to reduce the chargeable gain.
More than one residence
Where an individual (or married couple) have two or more residences, only one residence at any one time can be treated as the main home for exemption. This is done by an election. Provided a particular residence has been the main home at some time, then generally the last 18 months of ownership is exempt. This applies even if another residence has now become the main home during this time.
Example: Joe has a house in Luton which is his principal private residence, which he has owned for eight years. Fed up with commuting he buys a flat in central London and elects for this to be his main residence. Exactly five years later he sells his home in Luton.
The Luton home is exempt for the first eight years whilst he was living in it and for the last 18 months because, even though he had another home which was his main residence during this time, the last 18 months is always exempt provided the home in question qualified as the main residence at some point.
9.5/13 of the gain on the Luton home will be exempt from CGT. Upon the eventual sale of the flat the whole of that gain will also be exempt.
The main residence exemption and letting relief can be complex. The government is also
making changes to these reliefs from 6 April 2020.
Inheritance tax (IHT)
The general growth in house prices has caused real IHT worries. This is because retaining the family home in the estate when it is often the largest asset could result in an IHT liability of up to 40%. At the same time, finding a way to deal with it efficiently for IHT is difficult because individuals need a place to live. The government has introduced measures to reduce the problem for many families.
Help to Buy ISA
The Help to Buy ISA, provides a tax free savings account for first time buyers wishing to save for a home.
The scheme provides a government bonus to each person who has saved into a Help to Buy ISA at the point the purchase of their first home is completed. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings.
Tip: Those saving for their first home should first consider the Lifetime ISA. The Lifetime ISA allows more to be saved and the bonus is added to the account at the end of each tax year.
Help to Buy ISA accounts are being phased out from 30 November 2019 when this type
of account will be unavailable to new savers. Those with accounts can keep saving until 30 November 2029 when accounts will close to additional contributions. An individual must claim their bonus by 1 December 2030.
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