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.

Which property?

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

Property taxes have been devolved across the United Kingdom with Stamp Duty Land Tax (SDLT) having been replaced by Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales.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. Please contact us for further advice on this area.

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 restricted to the basic rate of income tax. Relief is given by way of a basic rate reduction rather than the costs being deductible in full from the rental income. This restriction to a basic rate reduction has been phased in over four years from April 2017. This reduction may be subject to further restrictions where property or other non-savings income is insufficient.

Disposal

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 property has been improved then these capital costs may be available to reduce the value of the gain.

The CGT annual exemption results in the first £12,300 of gains, for 2020/21, being tax free.

In general CGT is payable at 10% where total taxable gains and income, after taking into account all allowable deductions are less than the income tax basic rate band. CGT is payable at 20% on gains, or any parts of gains, above this limit. However, higher rates (18% and 28%) apply for chargeable gains on residential property that do not qualify for private residence relief.

New reporting and payment requirement

It is important to note that from 6 April 2020 those liable to CGT on a UK residential property disposal must send a new standalone online return to HMRC and make a payment on account of the tax due within 30 days of completion of the sale.

Please contact us for more information on any of the issues discussed in this guide.

Main residence

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.

Tax Planning

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 some exceptions, periods of absence are chargeable to capital gains tax. Prior to 6 April 2020 letting relief gave up to £40,000 (£80,000 for a couple who jointly own the property) to someone letting part or all of a property which was their main residence or was their former main residence at some point in their period of ownership. However under the revised rules letting relief is only available where the owner and tenant share occupancy throughout the period of the let.

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 nine 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 nine months because, even though he had another home which was his main residence during this time, the last nine months is always exempt provided the home in question qualified as the main residence at some point.

8.75/13 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 can be complex and often causes a good deal of misunderstanding.

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. Please contact us for details.

Lifetime ISA

The Lifetime ISA, provides a tax free savings account for those wanting to save for later life or for first time buyers wishing to save for a home.

The Lifetime ISA is available for those aged between 18 and 40. Each person can save up to £4,000 each year up until the age of 50, and receive a government bonus of 25% (a bonus of up to £1,000 a year). The bonus is paid at the end of each tax year and savers can use some or all of the money to buy their first home.

Help to Buy ISAs are no longer available to open, however, existing account holders can continue to save into them. 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

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.