Buy To Let and Your Tax Situation
Buy to let as an investment vehicle has risen in popularity in recent years, partly as a result of the boom in property prices which offered significant capital appreciation to investors and partly due to high immigration levels which increased demand for rental property. At the end of 1999, there were only 73,000 outstanding buy to let mortgages, but there were just about 850,000 at the end of 2006. That's an increase of over one thousand percent in just six years. Little wonder that Revenue and Customs officials have been attracted to the opportunities for tax collection from buy to let operations. There are at least two revenue streams involved.
Tax on income
Buy to let landlords should declare rental income on their property after deducting allowable operating expenses related to the property. Revenue officials now feel that about 80,000 landlords have not declared this income or have deducted too much in expenses, thus avoiding payment of taxes due thereon.
In February of this year, Revenue officials were reported to have been quietly gathering tax-related data on erring landlords. HMRC has now announced a tax amnesty for people who voluntarily admit to mistakes in their declarations of income.
If you think you may have made such mistakes, you should submit a new declaration before June 22 2007 in order to be covered by the tax amnesty. The penalties you pay on the untaxed income will then be lower - up to 10% of the unpaid tax. Without the amnesty, you would normally be required to pay 100% of tax owed.
In making your declaration, you should not forget the tax relief you get for legitimate expenses. In the self-assessment form that you will complete you will find the expense items that are allowable as deductions from your rental income. In case these allowable expenses exceed your income, then you have no tax bill to worry about.
Allowable expenses include professional fees you pay to letting agents and accountants, premiums for insurance on buildings and contents, and cost of services that you provide.
Remember that mortgage interest is completely deductible. If you have an interest-only mortgage, then practically all of your payments will enjoy tax relief. However, if you have a repayment mortgage, only the interest portion of your monthly payments may be deducted. That may require a bit more calculation, since the interest portion on payments will progressively diminish year after year. This tax deductibility feature, by the way, is what makes interest-only mortgages attractive to most buy to let investors because it results in lower monthly payments and more tax relief.
The tax amnesty approach is conciliatory, and is intended to encourage people to come forward. What everyone should know is that the Revenue Office has collected substantial data about landlords. Revenue officials even used a computer program to trawl the Internet for letting advertisements. Those who do not come forward voluntarily can easily become the subject of full-blown investigations.
Tax on capital gains
The buy to let industry may also provide a windfall in capital gains taxes to the Treasury. Based on current values of buy to let properties compared with the original acquisition costs, the estimated capital gains taxes on existing properties could easily exceed £4 billion when these properties are sold.
Some investors have recently sold their properties because of rising interest rates and flat growth in rental incomes. If you're thinking of selling, note that the first £9,200 in capital gains will be tax-exempt; if you are married and you've transferred one-half of the property to your spouse before selling, you can claim double the tax allowance or £18,400.
Owning the buy to let property for more than three years allows you to claim taper relief in which capital gains tax is reduced at 5% percent each year down to a minimum of 60% CGT payable. These CGT allowances support the view that buy to let properties can be a good long term investment with both benefits to both taxable income and long term capital growth.
Note
This article is for information only - you should seek professional advice before making any investment decisions about buy to let properties.
