Investing in a buy-to-let can be a good idea but there are a few things from tax perspectives that you need to take into account before deciding to invest.
You need to consider that you will probably pay tax when you purchase the property, you will pay tax on the rental earnings and when you decide to sell the property. Stamp Duty Land Tax (SDLT) More commonly known as stamp duty, SDLT is tax you pay when you purchase any property. Current rates of SDLT are;
Form April 2016 the government has decided to add an additional 3% above the current SDLT rates for purchases of second home or buy-to-let properties. Income Tax on Rental Earnings Profits form rental income are subject to tax in the same way as other earnings. To calculate your profit you take all rental earning and take away any “allowable expenses” which we discussed in December 2015, to read about “allowable expenses” click here. Capital Gains Tax (CGT) When you dispose of an asset you need to pay CGT on the gains. Every year you have an annual tax free allowance, for the tax year 2015/16 this allowance is £11,100 which means gains of up to this threshold are tax free. Any gains over the annual tax free allowance are subject to tax at 18% for basic rate taxpayers, and 28% for those in higher tax bracket. You could reduce your CGT bill by offsetting some of your expenses against it, as follows:
You don’t pay CGT on your main place of residence, so if for any period you own the property and lived in it as your only home, this period could qualify for Private Residential Relief (PRR). Example of Calculating CGT If you own a property for 10 years (120 months), live in the property as your main residence for 2 years (24 months) then use the property as second home for 4 years (48 months) and rent the property for last 4 years (48 months) you can claim both private residence (PRR) and Letting Relief. Assume the profit made is £50,000. The amount of PRR you can claim is 24 months, plus 18 months for the final period of ownership, equaling 42 months which equates to 35% of the total period of ownership. You can claim Letting Relief on the 30 months, this is 48 months minus the 18 months of PRR. This equates to another 25% of the total period. Total Gains £50,000 Less PRR £17,500 Less Letting Relief £12,500 Less 2015/16 Allowance £11,100 Total Gain Subject to CGT Charge £8,900 The £8,900 is subject to capital gains tax charge at either 18% or 28% depending on the total income of the tax payer in that year. For further information please contact us on info@intact-accounting.co.uk.
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Expenses fall into two categories, Capital Expenses and Revenue Expenses which are directly related to the lettings business.
One way of distinguishing between the two types of expense is to ask how long does the benefit of the expense last? If the expense is, for example, the cost of adding a bedroom to the property then this would be considered a capital improvement. Any tangible improvement to the asset is considered a capital improvement and therefore not an allowable expense for the purpose of Income Tax. However, decorating a property is considered a revenue expense as every property would need to be redecorated at some point. These expenses can be claimed for the purposes of Income Tax. Here is a list of allowable Expenses:
For further information please contact us on info@intact-accounting.co.uk. |
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