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Introduction »
Property matters
In recent years, the stock market has had its ups and downs. Add to this the serious loss of public confidence in pension funds as a means of saving for the future and it is not surprising that investors have looked elsewhere.
Buy to let
The UK property market, whilst cyclical, has proved over the long-term to be a very successful investment. This has resulted in a massive expansion in the buy to let sector.
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 - ie the rent received less costs such as letting fees, maintenance, service charges and insurance - is no longer as attractive as it once was. 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.
Tax on rental income
Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest, repairs, agent’s letting fees and an allowance for any furnishings provided.
Disposal
Where property is disposed of capital gains tax (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 are also available to reduce the value of the gain. The CGT annual exemption results in the first £10,600 of gains, for 2011/12, being tax free. CGT is payable at 18% or 28% on gains depending on the level of your income. This is further explained in the next chapter.
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 exceptions, periods of absence are chargeable but, if the main residence was let during absences, as a result of which a charge arises, a ‘letting relief’ may apply to reduce the chargeable gain.
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 the last three years of ownership will always be 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 and 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 three years because, even though he had another home which was his main residence during this time, the last three years is always exempt provided the home in question qualified as the main residence at some point.
11/13 of the gain on the Luton home will be exempt from capital gains tax. 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. Please contact us for further advice before making transactions in property.
Inheritance tax (IHT)
The general growth in house prices over the last three decades, in particular, 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.
There have been many schemes devised to solve the problem and HMRC have successfully tackled many of these.
It may still be possible to plan to mitigate some of the effect of the value of the family home particularly by careful planning using Wills.
An important prerequisite of such arrangements is that the property, if occupied by spouses or civil partners, should be owned jointly in such a way that there is no automatic transfer to the survivor on the first death. This means that each spouse, or civil partner, has a clearly defined legal interest in the property which can be left according to their Will and does not automatically fall into the ownership of the survivor.
The legal systems in the different legal jurisdictions in the UK achieve this in technically different ways but each allows for this approach. Please contact us if you need further information.
Introduction »
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