Buy-to-let properties have attracted thousands of investors. But before you take the plunge, it's important to consider the tax implications.
Taxes on buy-to-let properties: Britain's landlords are required to pay tax on rent and capital gains tax, but there are ways to minimise this.
Rent income will be treated as income and taxed in line with your basic or higher-rate tax bands.
You can, however, be able to offset mortgage interest payments, letting agency costs and maintenance expenses against the taxable rental income.
This can make it more tax-efficient to have a mortgage on your investment property rather than your main home where you can no longer get tax relief on your mortgage.
Rental incomes should be declared on an annual self-assessment tax return, it may be worth seeking an accountant to ensure all tax breaks are taken advantage of.
Tax on the property price rise
Capital Gains Tax (CGT) comes in when you sell a buy-to-let property at a profit.
From April 2008, capital gains tax was changed to a flat rate of 18%. Any gains above the annaul £10,100 (2009/20) personal threshold will attract CGT.
Before CGT as charged at up to 40% and taper relief cut this, if a property had been owned for more than three years. This no longer applies.
Capital gains tax applies to any property which is not your main home, known as the Principal Private Residence. If you only have one property and it is considered your PPR, then you do not have to pay CGT, however, the taxman may want evidence that you were actually living there.
CGT liabilities should be declared annually on your tax return and anyone making a substantial sum from selling a property should seek out a good accountant, who can take advantage of all available breaks.
Stamp duty tax is payable on buy-to-let properties by the purchaser, as all other residential properties. The current rates are 1% above £125,000, 3% above £250,000 and 4% above £500,000. A stamp duty holiday currently applies until the end of the year on all properties under £175,000.
Most people think that one way to dodge tax - and are often advised by accountants - is to put a second home in the name of their partner. When they come to sell, they claim their partner has been living in the property thereby making it exempt from CGT.
This choice is easier for people who have done let-to-buy: they keep the mortgage on the first home which they lived in - and then take a second traditional mortgage with another lender on an additional home where they live.
In this way you can bypass the need for a proper buy-to-let mortgage on the first property, which would alert the taxman. However, it breaches the lender's rules, which means they could call in the loan without notice. More importantly, evading CGT in this way would be treated as illegal and result in fines or even imprisonment.
However, there are more complicated ways of mitigating tax on buy-to-let, including setting up a company to own the properties. For the average amateur investor this is not worthwhile as it is expensive, complicated and can limit access to mortgage finance.
Cutting down on capital gains tax
Typically, buy-to-let owners and those with second homes can slash tax bills if they have ever lived there as their principal private residence and through lettings relief
And everyone's main home - or principal private residence as the taxman catchily names it - is exempt from capital gains tax when sold, but any other properties they own attract CGT at their highest rate when sold.
For example - an unmarried couple may each own a home that qualifies as their principal residence but a married couple may only nominate one property and must elect jointly.
And it is possible to cut capital gains bills by living in the second property for a period of time. Special rules apply to properties that have been a main residence. The period when it was the main residence is exempt, plus the last 36 months of ownership.
As for those who have previously rented out their main residences there is the added benefit of being able to claim up to £40,000 letting relief. This is available to anyone with a share in the property - giving a couple, even if married, up to £80,000 between them.
Finally, the amount of private letting relief that can be claimed cannot be greater than £40,000 and must be the lower of that sum, the amount of principal private residence relief being claimed, or the capital gains made during the letting period.
The best advice however that the wisest of investors make sure to have is to use a clever tax accountant to handle your affairs. The tax saved will be much greater than the fees they will ever charge.
Tax Affinity Accountants based in Kingston Upon Thames, are experts in tax and accounting. Visit www.taxaffinity.com for more interesting articles. Please feel free to comment and share this article with your friends.
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