Are you looking to enter the property investment market or are you an established investor looking for Buy to Let guidance and advice?
AccountsPro are Property Specialist Accountants in all aspects of property accounts and company and personal taxation.
As property specialist accountants, we can help you make an informed decision on how to invest in property in the most tax efficient way. Not having a full understanding of accounting and tax implications can significantly impact your return on investment.
Is Buy to Let still a worthwhile investment?
This question goes beyond the issue of tax and to a large extent it depends on the type of investment your looking for and your ultimate goal of your investing activities.
In recent years, the stock market has had its ups and downs. The public have lost confidence in pension funds as a means of saving and investors are looking for alternatives. The UK property market has been known for its success in long term investments resulting in an expansion in the buy to let sector.
If you are in a position to invest in property, it can be a beneficial asset to have but there are essential things you should know. You might be an experienced investor who wants to brush up on your buy-to-let knowledge or be familiar with property investment but after starting to look for an opportunity and build an investment strategy you still feel unsure about things.
Knowledge is key – knowing which property will deliver the income and capital growth you require takes experience.
Understanding the basics is one of the most essential tips when beginning your property journey and as property tax accountants, we at AccountsPro can advise and guide you to get the most out of your venture.
BUY TO LET – FACTS TO CONSIDER
- think of your investment as medium to long term
- research the market
- do your sums carefully
- aim to attract tenants quickly
- get advice & guidance from a property specialists tax accountant
- purchasing property that may have serious maintenance problems
- rely on friends and family to look after the letting for you – consider a full management service
- cut corners with tenancy agreements and legal documentation
WHICH PROPERTY TO INVEST IN?
Buying a home and investing in a buy to let property is not the same.
- Consider which type of property you want to invest in – for example residential property, student let, or furnished holiday let
- Seek advise from a local agent about the market for rented property and what is in demand in the area.
- Consider local amenities and transport and the standard of decoration and furnishings to ensure a quick let.
- Use an agent to save time and inconvenience. An agent will deal with viewings by prospective tenants and provide quick solutions to maintenance issues.
When buying to let, all aspects of taxation must be considered.
Tax on Rental Income
It was previously possible to deduct some of the finance costs when working out the property rental profits.
From April 2020, you are no longer able to deduct finance costs from your profits but instead claim the basic rate tax deduction on 100% of the costs. The basic rate deduction is 20%.
These changes affected anyone letting a residential property as an individual, a partnership, or in a trust. As a result, landlords can no longer deduct all of their finance costs from their property income to arrive at their property profits.
Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments.
This restriction does not apply to landlords of furnished holiday lettings or commercial property lets.
Tax on Sale
Capital Gains Tax (CGT) will be payable on the eventual sale of the property. This will be based on the disposal proceeds less the original costs of the property, certain legal costs and any capital improvements made. The gain can be further reduced by any annual exemption available.
CGT is generally charged at 10% for basic rate tax payers and 20% for higher rates. However, 18% and 28% rates apply to chargeable gains arising on the disposal of residential property that does not qualify for private residence relief (PRR).
CGT is payable on 31 January after the end of the tax year in which the gain is made.
From April 2020, you will need to make a payment on account of CGT due within 30 days of completion of the disposal. This will not affect gains on properties which are not liable to CGT due to PRR.
Buying to let makes sense if you have children at college or university. It can be beneficial for the student to buy the property with several advantages:
- This is a cost effective way of providing your child with somewhere decent to live.
- Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments from a cash flow perspective.
- As long as the property is the child’s only property it should be exempt from CGT on its eventual sale as it will be regarded as their main residence.
- The amount of rental income chargeable to income tax is reduced by a deduction known as ‘rent a room relief’ (£7,500). In this situation no expenses are tax deductible. Alternatively expenses can be deducted from income under normal letting rules where this is more beneficial.
Furnished Holiday Lettings
Furnished lettings (FHL) are another type of investment that can be considered. This is letting for short-term holiday lets rather than the residential market.
To qualify as a Furnished Holiday letting property, a number of conditions apply:
- The property must be in the UK or European Economic Area (EEA)
- The property must be available for commercial lettings as holiday accommodation to the public for at least 210 days (30week) of the tax year
- Our of the 210 days, the property must be let out for at least 105 days (15 weeks) as holiday accommodation.
- Offset losses from FHL against personal income tax
- Claim capital gain tax reliefs – business asset rollover relief, entrepreneurs relief, relief for gifts of business assets
- Claim capital allowances on costs incurred to furnish the property.
Tax allowance for Property and trading income
You can get up to £1,000 each tax year in tax-free allowances for property and trading income.
The property allowance is a tax exemption of up to £1,000 a year for individuals with income from land or property. This allowance can be used to reduce your taxable income.
If you want to learn more about property investment, our team of accountants are on hand to help you every step of the way. Giving you a solid foundation of advice both when starting out as an investor and as an established investor needing continued guidance to stay tax efficient.