The number of households entering the private rented sector continues to grow.
The lure of the residential property sector looks ever more appealing to property investors, particularly in the buy-to-let market.
The latest Census figures show that the number of households renting privately increased from 2.6 million to 4.2 million between 2001 and 2011 across England and Wales.
It’s now estimated that there are some 4.8 million households renting property in the private rented sector across the UK.
Moreover, top property agent Savills is predicting that average rents in the mainstream buy-to-let market will rise by 18.2% by 2017. So it’s obvious why the market is a very attractive prospect for investors. However, what about the small matter of taxation? How are buy-to-let properties treated by HMRC, and how can accountants like Steven Glicher help? Hopefully, the following information will provide some clarity.
- The income derived from buy-to-let investments is treated as the profits of a Property Income Business. If the owner of the property is an individual or a trust, the profits are charged to income tax for the tax year to 5th April. If the owner is a company, the profits are charged to corporation tax for the accounting period of the company.
- Although letting property is generally regarded as an investment activity, the accounting rules for working out trading profits are applied. Allowable expenses are broadly those whose benefit is only felt in the immediate period, and do not affect more than one year. The costs incurred must also be wholly and exclusively for the purposes of the letting. So for example, an adjustment must be made where there is a private element of the expenses. Interest payable on a loan to acquire or improve the property is allowable.
- Capital allowances are not available on plant and machinery used in dwellings. However, owners of furnished properties can claim a wear and tear allowance of 10 per cent of the net rents to allow for the cost of replacing furnishings, for example. [Net rent is the rent less any expenditure that would normally be incurred by the tenant, such as heat and light.] This is normally the best option, although it is possible to claim relief for furnishings and fittings on a renewals basis whereby no relief is given for the original cost but full relief is given for the replacement cost when that occurs.
- The cost of repairs can be set against the rental income, but it is often very difficult to distinguish precisely between what constitutes repair and what amounts to improvement. Where a fixture is replaced with a similar fixture this will usually be an allowable deduction as a repair, but where a new fixture is installed where one did not exist before or the size or quality of the replacement fixture represents an improvement in the value of the property, no tax deduction will be given against the rental income. Any tax relief for improvements will only be given when the property is sold.
- Landlord’s Energy Saving Allowance – landlords incurring capital expenditure up until 5th April 2015 to install loft insulation, cavity wall insulation or floor insulation in residential property may claim a deduction against rental profits of up to £1500 per property.
- The expenses and income of different properties owned by one person in the UK are pooled together in any one tax year, to reach an overall profit or loss for the letting business. Any overall loss is normally carried forward to set against later rental income. However, relief is available for excess capital allowances to be set against other income of same and/or following year.
- Rental property abroad – when a property is rented out abroad, the calculations relating to taxable income are very similar: however, it’s important to note that tax may be payable in the country where the property is situated, as well as in the UK.
- Where the landlord of a UK property is non-resident, basic rate tax should normally be deducted at source from the net rental income by the letting agent or by the tenant; unless HMRC have agreed that the landlord will complete a self-assessment tax return in the UK.
- There are special advantageous rules which apply to properties which qualify for furnished holiday lettings.
- Capital gains on the sale of buy-to-let properties are taxed at 18% or 28%.
How We Can Help You.
Liability for tax on buy-to-let property will vary according individual circumstances. That’s why it always pays to consult with a qualified and experienced accountant. For further help or information on the tax liabilities of buy-to-let property, contact Steven Glicher accountants on 0161 485 8007.