Making More Out of Your Buy-to-Let

1. Making More Out of Your Buy-to-Let Kelly Goodchild Tax Supervisor Streets Chartered Accountants The Bentley Hotel Friday 1st November 2013

2. Streets Chartered Accountants • Top 40 UK accountancy practice • 11 offices including Lincoln, Grantham, Peterborough and Hull • 27 Partners and Directors • Dedicated tax practice • Property tax specialists

3. Streets Chartered Accountants – Property Tax Specialists • Development, investment, a home for your business, buy to let and renewables • Our specialist property advice and service includes: • VAT – including the option to tax • Capital Gains • Stamp Duty Land Tax – SDLT • Capital allowances • Estate planning and inheritance tax • Self Assessment and Corporation Tax returns

4. Tax issues for Landlords Income Tax issues Allowable expenses and loans Wear and tear / renewables Furnished Holiday Lets Non Resident Landlords Capital Gains Tax issues Private residence relief Family gifts

5. Income Tax Issues Common Types of allowable expenditure include:- • Mortgage Interest • Repairs • Letting Agent Fees • Insurance • Ground Rent and Council Tax • Water Rates • Cleaning and gardening • Accountancy fees

6. Income Tax issuesMortgage Interest • Allowable as long as “wholly and exclusively” for the rental business • Costs of obtaining loan finance also allowable • Consider drawing down on capital

7. Income Tax issuesMortgage Interest - Example • Mr A has a property that he purchased for £100,000 • He has an outstanding mortgage of £80,000 • He is offered a job in Holland and moves there to live and work • He decides to rent out his UK property whilst in Holland and when he starts to do this his property is worth £375,000 • He renegotiates his mortgage on his loan, converts to a buy to let mortgage, and borrows a further £125,000

8. Income Tax issuesMortgage Interest - Example Opening balance sheet of his rental business is:- Mortgage £80,000 Property at market value £375,000 Capital account £295,000 Balance sheet after increasing mortgage is :- Mortgage £205,000 Property at market value £375,000 Capital account £170,000 The loan interest on the whole mortgage is allowable, and the additional £125,000 can be spent on a flat in Holland! Consider taken out a further mortgage up to £170,000 to fund a worldwide cruise! And get tax relief!

9. Income Tax issuesRepairs • Repairs allowed, but not capital improvements • If improvement is because of new materials – repair • Major expenditure – apportion between capital and revenue • Expenditure after acquisition – allowable? • Capital allowances are generally not available • Replacement of fixtures should be allowable

10. Income Tax IssuesRepairs Furnished Properties • From 2013/14 tax year the renewals basis is withdrawn • Applies to letting of furnished property • Must now claim 10% wear and tear allowance • Covers items a tenant would normally provide in unfurnished accommodation e.g. TVs, beds, curtains, white goods etc • Can still claim for renewals of fixtures e.g. boilers, baths, toilets etc

11. Joint Ownership Married couples and civil partners – 50:50 subject to election to reflect actual ownership Consider transfer of 1% to lower earning spouse Unmarried joint owners – subject to tax on percentage of property owned Consider an agreement to split profits in a different ratio

12. Furnished Holiday Lettings Applies to properties in the UK and the European Economic Area Advantageous from a tax point of view e.g. qualify for CGT reliefs From April 2011 no longer ability to offset losses against other income Qualification rules are tightening from April 2012 Consider selling whilst properties still qualify

13. Non-Resident Landlords • If you move abroad and rent house out – still liable to UK income tax / complete a tax return • Agent automatically deducts tax at source – 20% • Opt out, completion on NRL1 form

14. Capital Gains Tax • Gains on disposals of properties are subject to CGT (18%/28%) • Possible qualification for Private Residence Relief and Lettings Relief • Rules apply equally to family gifts

15. Private Residence and lettings relief • Consider whether it is possible to occupy a property as main residence before sale • Do it properly • No minimum period – quality not quantity • Actually occupy • Redirect post • Updating voting register • Tell the Revenue • Plausible reason

16. Private Residence and Lettings Relief • Mr B, a higher rate taxpayer, acquired a property in 2002 for £200,000 • Property sold in 2012 for £650,000 • Tax on gain after annual exemption of £123,032 • If occupy for 1 year prior to sale the tax is reduced to £74,032

17. Family Gifts • Gifts between family members (other than spouses) are subject to CGT • “Sale proceeds” are equivalent to the market value of the property at the date of gift • Route through trust • Don’t forget about SDLT • Don’t lose out on private residence relief if buying property for children • IHT – Gift 90% to child – retain rents - PET

18. Making More Out of Your Buy-to-Let Kelly Goodchild Tax Supervisor Streets Chartered Accountants kgoodchild@streetsweb.co.uk www.streetsweb.co.uk