The purchase of property to be let to tenants has become a widely popular form of investment. The returns on your investment come from two potential sources:
- the income you receive from rents; and
- in the longer term, any appreciation in the capital value of the property if and when you come to sell it.
Maximising the profits from any property portfolio, however, is a question not only of these income streams but also the cost of owning and letting the premises you own – the operating costs such as landlord insurance, maintenance, letting agency fees and last but not least the tax you pay.
Income tax is rarely a simple or straight forward matter. For buy to let landlords, the subject is set to become considerably more complicated, thanks to changes which were heralded in the Chancellor’s summer budget and which will start to come into effect in 2017, for full implementation by 2020.
First the bad news. The principal change is the removal of landlords’ previous entitlement to deduct interest payments on buy to let mortgages from their taxable incomes. The change may have dire results for some landlords:
- tax relief on such interest payments may have been a major consideration when acquiring a property portfolio – simply because of the sums involved;
- in instances where a buy to let business has been struggling to make a profit, the need to pay tax on income received, without the relief of tax deductible interest payments, may make the investment no longer financially viable;
- in those cases, the slender profits may in future be entirely consumed by the tax that needs to be paid – and in cases the tax liability might even exceed the income from rents;
- a report by the International Business Times on the 8th of July 2015, for example, explained that currently mortgage interest payments of £100 effectively cost just £55 thanks to the tax relief – after the changes take effect, the cost of that same £100 interest payment rises to £85;
- calculations made in a report by the Telegraph newspaper on the 10th of November 2015 suggest that in cases where mortgage repayments account for between 68% and 75% – or more – of rental income received, profits from the property investment are likely to be entirely wiped out.
Despite these new tax issues for landlords, there is at least some good news. There remains a long list of expenses likely to be faced by property investors which are still deductible against taxable income – making it important to claim these deductions in order to maximise the profits on your portfolio:
- the cost of setting up your mortgage, including the cost of any mortgage broker’s fees, continue to be deductible;
- costs associated with finding your tenants – advertising, tenancy agreements, inventories, and any letting agency fees you may pay – are also still deductible;
- you may claim tax relief on the cost of your landlord insurance – including cover for both buildings and contents;
- whilst you cannot claim the cost of furnishing your let property, you may claim for the cost of replacing specific items of furniture or claim a general wear and tear allowance on all furnishings – at the rate of 10% of the annual rental income on the property;
- whilst you cannot claim for any of the expenses involved in extending, renovating or refurbishing your property, you may claim for the cost of maintaining the existing structure and fabric of the building in a good state of repair;
- if you engage an accountant to prepare your accounts, you may claim for the fees charged – and remember that any landlord needs to submit an annual self-assessment for tax purposes.
Capital Gains Tax (CGT)
If you decide to sell any property in your portfolio and this realises a profit – you sell it for more than it cost you to buy – you are also liable for Capital Gains Tax.
When calculating the profit or capital gain you make, you may deduct what you have spent on any improvements or refurbishment – but not the accumulated costs of maintaining the property – together with the fees you pay for conveyancing and any estate agents you instructed.
The issue of Capital Gains Tax may also be complicated by the fact that you may be entitled to some degree of relief if the property was used as part of your own business or if your business is simply the purchase and sale of property.
If you are resident in the UK but hold a portfolio that includes property overseas, you are still liable for any Capital Gains Tax on the profits of any properties abroad.
Hopefully this piece on the latest legislation will enable you to make informed choices in relation to your let property or properties. Please note that is written around our current understanding of legislation as at December 2016 and these could change in the future. We also recommend you seek independent advice relating to tax issues.