UK: Tax Tips For Buy-To-Let Landlords

Last Updated: 16 September 2009
Article by Geoff Everett

The primary tax concerns for property owners include income tax, loss relief, CGT and deductible expenses.

Income Tax

Interest on loans to acquire, refurbish, or improve let properties is an allowable deduction against the rental income. Landlords acquiring new properties and those with existing properties should consider the tax benefits of loan finance (if available) compared to using their own capital funds.

A landlord who uses his/her own funds to wholly or partly finance the purchase of a let property may wish to release capital. A loan secured on the property should qualify for interest relief. However, that relief will be limited to the interest that would be payable on a loan figure equivalent to the capital contributed to the rental business. This principle will apply to a property that a landlord introduces to his/her letting business e.g. a former main residence.

In view of the Finance Act 2009 changes to the treatment of furnished holiday lettings and the extension of this treatment to properties located in the European Economic Area (EEA) until April 2010, it may be appropriate to review whether properties you hold in this region qualify for the regime. This may be useful where losses have been incurred and there is income available from other sources against which to set those losses.

Joint Ownership

There are important property law implications where property is held jointly which should always be taken into account.

Depending on the tax profile of the parties, it may or may not be desirable, from a tax point of view, for property to be owned jointly. Where property generating rental profits is held jointly there is the possibility to use two sets of income tax personal allowances, and basic rate bands.

However, with the removal of the personal allowance from 6 April 2010 for those with income over £100,000, and the new 50% tax rate for those with income over £150,000, sole ownership may now be preferential where one spouse/civil partner is within these rules and the other is not, even if the lower earning spouse is a 40% taxpayer.

On the sale of the property there is also the opportunity to use two capital gains tax (CGT) annual exemptions. Where there are joint owners, CGT letting relief is potentially available to each owner. Letting relief is discussed in brief elsewhere in this article.

There are inheritance tax implications where property is owned jointly and also special rules for spouses/civil partners who let property owned jointly which should be considered.

CGT

Property, including the family home, is a chargeable asset for CGT purposes. There is, however, a specific CGT provision to exempt from tax gains or losses on the only or principal residence of a typical individual. These provisions mean that on a standard residence where the whole of the property has been used throughout the period (or until the last three years) of ownership as the individual's main home there is generally no tax to pay on any gain realised on the sale.

The rules can be complex and where there are multiple residences or letting is involved, individuals should seek specialist advice.

There is the potential to claim a significant amount of relief where a property which has been let out as residential accommodation was, or becomes, the principal residence of the landlord.

In broad terms, the maximum relief an individual can claim under this heading is a deduction from the chargeable gain equal to the lower of either £40,000 or the gain attributed to the letting period(s). A letting relief claim is in addition to the private residence relief attributable.

Neither private residence relief nor letting relief can turn a gain into a loss. The reliefs will only restrict the gain to nil.

With respect to the Finance Act 2009 announcements on furnished holiday letting properties, there are a number of CGT factors that should be considered before the advantages of this regime are removed in April 2010. For example: selling the property before April 2010 may give access to entrepreneur's relief (an effective CGT rate of 10% instead of 18%), which may not be available for a sale after that date. If a qualifying furnished holiday letting property located in an EEA country was sold prior to 5 April 2008 then business asset taper relief may have applied (potentially significantly reducing the rate of CGT applicable); it may therefore be worthwhile considering whether an amended claim can be made for this relief.

LESA

Private and corporate landlords can claim the costs of buying and installing specific energy-saving items (loft, cavity wall, solid wall and floor insulation, as well as hot water systems and draught proofing) in residential properties they rent out, as 100% deductions against their taxable profits. Landlords can claim tax relief on up to £1,500 of expenditure for each dwelling house (including each residential flat within a block of flats).

However, landlords can't claim the Landlords Energy Savings Allowance (LESA) for properties where they are already claiming an allowance under the rent-a-room scheme, or for properties rented out as furnished holiday accommodation, or if the energy saving item is installed in a property during the course of construction.

To claim the allowance landlords must have a relevant interest, and there are certain other restrictions on the timing of expenditure which qualifies for LESA.

Top Tax Tips

  1. For property rental losses generated by capital allowances, consider loss relief against income or profits from other sources.
  2. Where several properties are rented out in the same tax year, offset the loss from a loss-making property against the profit from a profit-making property.
  3. For jointly held profitable lettings, consider whether joint ownership is now efficient for income tax purposes where one party to the 'marriage' has total income of over £100,000.
  4. Review payments on account of tax liabilities to see whether a reduction is appropriate.
  5. Offset the interest you pay on your buy-to-let mortgage against rental income to reduce the amount of tax you pay. Check to see if there is scope to reorganise total borrowings to increase tax relief.
  6. Claim tax relief on appropriate expenses such as repairs (not improvement expenditure), insurance and letting agency fees. Where a property is furnished you can currently either claim a wear and tear allowance or a deduction against income for replacing furniture and equipment.
  7. Offset your accumulated UK rental losses against future UK rental profits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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