Steve J Bicknell Tel 01202 025252
Helpful Comments on Tax and Finance – Bicknell Business Advisers Limited www.bicknells.net
The Summer Budget 2015 was not great news for Landlords!
The 10% Wear & Tear allowance will end in April 2016 and landlords will only be able to claim for actual expenditure, this could have a ‘cap’ and restrictions, we await the full details. Many landlords will be disappointed at the loss of this useful tax relief.
From April 2017 tax relief on interest will be restricted so that by 2020 it will not be an allowable expense against profit but will attract 20% tax relief.
steve@bicknells.net
Its a common mis-understanding that many Buy to Let investors think that they can rollover the gains under business asset rollover reliefs.
Residential Property Investment is not a trading activity, whenever you sell a property that isn’t your main residence you will be liable to capital gains tax.
If you want to release cash from your property portfolio its better to consider other options such as re-financing to take advantage of capital growth.
Also joint ownership (particularly between spouses) will increase the available Capital Gains Allowance you have, individuals currently have £11,000 per year. This allowance might cover your gain?
steve@bicknells.net
The Official definition of an HMO is….
Your home is a House in Multiple Occupation (HMO) if both of the following apply:
Your home is a large HMO if all of the following apply:
A household is either a single person or members of the same family who live together. A family includes people who are:
Typically your tenants are likely to be:
Here is really useful guide from The House Crowd (2014)
HMO’s are popular because they have higher yields than other Buy to Let Residential Properties.
Many investors believed they could claim Capital Allowances on HMO’s Plant & Machinery but that isn’t the case.
HMRC’s considered view published in its capital allowances manual is that:
“A dwelling house is a building, or a part of a building; its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence. In most cases there should be little difficulty in deciding whether or not particular premises comprise a dwelling house, but difficult cases may need to be decided on their particular facts. In such cases the question is essentially one of fact … cluster flats or houses in multiple occupation, that provide the facilities necessary for day-to-day private domestic existence (such as bedrooms with en-suite facilities and a shared or communal kitchen/diner and sitting room) are dwelling-houses. Such a flat or house would be a dwelling-house if occupied by a family, a group of friends or key workers, so the fact that it may be occupied by [say] students is, in a sense, incidental. The common parts (for example the stairs and lifts) of a building which contains two or more dwelling houses will not, however, comprise a dwelling-house.” (CA11520)
So here is quick summary of ways to save tax on residential properties in general….
1. Claim allowable expenses
2. If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year
3. Claim for repair and advertising expenses incurred in getting the property ready for renting
4. Consider how the property is owned for example your partner may pay less tax or if you own it 50/50 you could use their capital gains tax exemption on sale of the property
5. Consider whether owning the property within a limited company might be better, Corporation Tax is 20% for small companies in the UK which can make dividends more tax efficient than personal income.
6. Make sure any borrowings you have are on the Buy to Let so that you can claim tax relief on the interest
7. Claim the Energy Saving allowance for energy saving work and save £1,500
steve@bicknells.net
Property Development is a trade, where as Property Investment isn’t – renting out a residential property is a VAT exempt supply.
If you are planning significant building work, setting up a Development Company or using a building contractor might save VAT.
Assuming you employ a builder…
The VAT Rules are in VAT Notice 708 Buildings & Construction
Your builder may be able to charge you VAT at the reduced rate of 5 per cent if you are converting premises into:
As your builder will be VAT registered, they reclaim the VAT they are charged and then charge you VAT at 5%.
If your business is property rental and you do the work yourself, you can’t take advantage of the 5% rate.
If your Development Company is VAT registered you can reclaim all the VAT.
Get your existing business or your property development company to convert the property and then sell it to another company that you own (may be an SPV) will be a VAT 5% Rated transaction. The other company then carries on the rental business.
steve@bicknells.net
If you own a Buy to Let property as an individual rather than in a limited company it is worth maximising your borrowings against the Buy to Let because the interest will be a tax deductible expense.
It doesn’t matter how you borrow:
The rules allowing this are covered in http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm
So, for example, if you had a Buy to Let property with low borrowings against it and a mortgage on your main private residence, you could increase your borrowings on the Buy to Let and pay off your private residence mortgage.
But you need to be aware that the maximum you can borrow on the Buy to Let is the market value when it was first let.
Here is an example from Tax Cafe – How to save property tax
Property investors are often unsure whether their interest is deductible. This depends on how the money is used. Use it to buy investment property and the interest is tax deductible. Use it for personal reasons and the interest is not deductible.
There is an exception to this rule: you can generally remortgage an investment property up to its original purchase price and the interest will be tax deductible, whatever you use the money for. For example, let’s say you bought a buy-to-let for £100,000 and the current mortgage is £60,000. You can borrow up to another £40,000 (if the bank will let you!) and all the interest will be tax deductible, no matter how you use it.
You will need to keep detailed records of the borrowing and interest for your tax returns.
Alternatively you might focus on paying off your main residence mortgage first to leave the borrowings high on the Buy to Let.
steve@bicknells.net
House prices are rising as confirmed by the Land Registry in their report 29 April 2013, the annual change is 0.9%, rent is increasing again after a drop in 2009 according to the English Housing Survey, in 2011 it went up 3% to a mean rent after housing benefit of £132 per week. So let’s see who the tenants are (English Housing Survey 2011):
| social and private renting households receiving Housing Benefit | ||||
| all social renters |
all private renters |
all renters |
||
| percentages | ||||
| age of household reference person | ||||
| 16 to 24 | 6.3 | 11.9 | 7.8 | |
| 25 to 34 | 12.6 | 26.9 | 16.5 | |
| 35 to 44 | 18.1 | 24.0 | 19.7 | |
| 45 to 54 | 16.3 | 15.8 | 16.2 | |
| 55 to 64 | 14.1 | 9.0 | 12.7 | |
| 65 to 74 | 15.8 | 7.8 | 13.6 | |
| 75 and over | 16.7 | 4.4 | 13.4 | |
| marital status of household reference person | ||||
| married1 | 16.9 | 18.4 | 17.3 | |
| cohabiting2 | 5.5 | 9.7 | 6.7 | |
| single | 33.2 | 37.6 | 34.4 | |
| widowed3 | 17.1 | 7.5 | 14.5 | |
| divorced4 | 20.9 | 17.0 | 19.8 | |
| separated5 | 6.4 | 9.9 | 7.3 | |
| household size | ||||
| one | 50.5 | 31.7 | 45.4 | |
| two | 23.2 | 28.7 | 24.7 | |
| three | 11.5 | 18.0 | 13.3 | |
| four | 8.2 | 12.3 | 9.3 | |
| five | 3.6 | 5.8 | 4.2 | |
| six or more | 3.0 | 3.4 | 3.1 | |
| household type | ||||
| couple, no dependent child(ren) | 11.5 | 8.0 | 10.5 | |
| couple with dependent child(ren) | 10.1 | 19.2 | 12.5 | |
| lone parent with dependent child(ren) | 20.9 | 35.1 | 24.7 | |
| other multi-person household | 7.1 | 6.0 | 6.8 | |
| one person | 50.5 | 31.7 | 45.4 | |
| length of residence | ||||
| less than 1 year | 8.4 | 27.7 | 13.6 | |
| 1 year, under 3 years | 15.4 | 32.5 | 20.0 | |
| 3 years, under 5 years | 13.2 | 15.5 | 13.8 | |
| 5 years, under 10 years | 20.7 | 12.3 | 18.4 | |
| 10 years, under 20 years | 22.2 | 8.0 | 18.4 | |
| 20 years or more | 20.1 | * | 15.7 | |
| economic activity of | ||||
| household reference person | ||||
| full time work | 2.7 | 13.1 | 5.5 | |
| part time work | 9.5 | 18.1 | 11.9 | |
| retired | 36.4 | 16.0 | 30.8 | |
| unemployed | 13.8 | 17.4 | 14.8 | |
| full time education | * | * | 1.5 | |
| other | 36.4 | 32.9 | 35.5 | |
| total | 2,395 | 890 | 3,285 | |
| £ per week | ||||
| mean gross weekly income | ||||
| of household reference person | 206 | 237 | 215 | |
| (and partner) | ||||
| sample | 1,945 | 690 | 2,635 | |
Yields are looking good, its possible to achieve 8% to 10%, take a look at the examples on http://investors.assetz.co.uk/property-listing.htm
Lending rates are low with Bank of England base rate stuck at 0.5%.
So we should see Buy to Let coming back into fashion with investors, with that in mind here are my top tips to minimise your tax:
1. Claim allowable expenses
2. If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year
3. Claim for repair and advertising expenses incurred in getting the property ready for renting
4. Consider how the property is owned for example your partner may pay less tax or if you own it 50/50 you could use their capital gains tax exemption on sale of the property
5. Consider whether owning the property within a limited company might be better, Corporation Tax is 20% for small companies in the UK which can make dividends more tax efficient than personal income.
6. Make sure any borrowings you have are on the Buy to Let so that you can claim tax relief on the interest
7. Claim the Energy Saving allowance for energy saving work and save £1,500
steve@bicknells.net
