Guide to Letting in the UK

By

Derek Williamson

FAIA, FFA, FIPA, CME

 


Buy To Let and Property Letting

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 – i.e. the rent received less costs such as letting fees, maintenance, service charges and insurance – is no longer as attractive as it once was.Investors need to take a view on the likelihood of capital appreciation exceeding inflation.

Factors to Consider

Do-think of your investment as medium to long-term

-research to local market

-do your sums carefully

-consider decorating to a high standard to attract tenants quickly

Don’t -purchase anything with serious maintenance problems

-think that friends and relatives can look after the letting for you – you’re

probably better off with a full management service

-Cut corners with tenancy agreements and other legal documents.

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.Is there a demand for say, two bedroom flats or four bedroom houses or properties close to schools or transport links?An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.

Agents

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! Also do you want to advertise the property yourself and show around prospective tenants? An agent will be able to deal with all of this for you.

Tenancy Agreements

This important document will ensure that the legal position is clear.

Taxation

When buying to let, taxation aspects must be considered.

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 allowable for furnishings.

Tax on Sale

Capital gains tax (CGT) will be payable on the eventual sale of the property.The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property.Currently this profit on disposal will be reduced by taper relief where you have owned the property for at least three years.Taper relief starts at 5% of the gain increasing to a maximum of 40% after 10 years ownership.

In the 2007 pre-budget report it was announced that there are proposals to radically reform the CGT system for 2008/09.The proposals include the abolition of taper relief and indexation allowance for CGT.Indexation is an allowance for inflation which is currently available to reduce the gain on disposals of property acquired prior to 6 April 1998.If you sold your property after 5 April 2008 then no taper relief or indexation is due but the gain will be taxed at a flat rate of 18%.

Student Lettings

Buy to let may make sense if you have children at college or university.It is important that the arrangement is structured correctly.The student should purchase the property (with the parent acting as guarantor on the mortgage).There are several advantages to this arrangements.

Advantages

This is a cost effective way of providing your child with somewhere decent to live.

Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments.

The income tax payable on the rental income is subject to a tax deduction known as ‘rent a room relief’ of £7,500 each year.

As long as the property is the child’s only property it should be exempt from CGT on its eventual sale as it will be regarded as their main residence.

Furnished Holiday Lettings

Furnished holiday letting is another type of investment that could be considered.This form of letting is short holiday lets as opposed to letting for the residential market.It has some advantages but it has other disadvantages which should also be considered.

Advantages

You may want to take a holiday in your own property, or make it available some of the time to your family or friends.Care would need to be taken to adjust the level of expenses claimed to reflect this private use.

Generally however the rules for allowable expenditure are more generous.

The income is regarding as trading income for tax purpose and is treated as earnings for pension contribution purpose.

Currently the more attractive rates of business asset taper relief will be available against the capital gain on the eventual sale of the property.One year’s ownership would attract 50% taper relief and two years ownership 75%.

As explained above for disposals after 5 April 2008 it is expected that no taper relief is available.

Disadvantages

Holiday letting will have higher agent’s fees, advertising costs, and maintenance fees.

Owning a holiday property may be more time consuming than you think and you may find yourself spending your precious holiday sorting out problems.

How We Can Help

Whilst some generalisation can be made about buy to let properties it is always necessary to tailor any advice to your personal situation.Any plan must take into account your circumstances and aspirations.

Whilst a successful buy to let cannot be guaranteed, professional advice can help to sort out some of the potential problems and structure the investment correctly.

We would be happy to discuss buy to let and the proposed CGT changes with you.Please do get in touch.


Using a Limited Company for Buy to Let Properties

If you are considering investing in Buy to Let properties through a Limited Company, it is important that you understand the advantages, disadvantages and responsibilities associated with company ownership before making a decision. We would certainly suggest that advice is taken from a financial and legal point of view before proceeding.

Should I set up a Limited Company for my Buy to Let properties?

There is not a straightforward answer to this question. For each case, the response could differ depending on personal circumstances, future intentions, and the availability of mortgage finance to Limited Companies for the purchase of Buy to Let properties. You should also be mindful that a Limited Company is required to file the accounts and financial status of the entire property portfolio with Companies House on an annual basis.

Advantages of using a Limited Company

Higher tax relief - From 2017 to 2020 the amount of Buy to Let tax relief individual landlords can claim back will be progressively cut from a maximum of 45% to 20% for top rate taxpayers. However, this change does not affect Limited Companies. Therefore, if you are a top rate tax payer, the tax payable via a Limited Company will be lower than tax on individual income.

No tax on dividends ≤£5,000 for individuals – from April 2016, the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance of £5,000. This means your client canpotentially receive tax free dividend income from their investment properties.

No income tax when reinvesting profits to secure further properties – You could grow a BTL portfolio more quickly within a Limited Company as there will be no income tax on the retained profit, thus allowing more cash to re-invest. Although corporation tax is payable on trading profits (20%; 2015/16; reducing to 18% by 2020), this is lower than the higher income tax rate (40% for £31,786 to £150,000; 2015/16).

Personal funds can be drawn back out of the company - any advances you make to your Limited Company (e.g. the mortgage deposit), you can draw back out of the company by way of Directors Loan.

Your Investment – You will probably have loaned the business monies to buy the property. HMRC now allow £1,000 tax free interest income; so you should charge the business for use of your money.

Disadvantages of using a Limited Company

No Capital Gains Tax (CGT) allowance when the company sells a property – whereas individuals selling a property would have £11,100 CGT allowance (2015/16)

Additional cost of running a Limited Company - such costs include the preparation of accounts, company tax and corporation tax calculations for HMRC, filing at Companies House, legal fees, and annual auditing if applicable.

Higher mortgage rates – Most lenders charge higher interest rates and fees for Limited Companies compared to Individual Buy to Let mortgages.

Reduced choice of lenders and mortgages – Many lenders do not offer mortgages to Limited Companies, and often if they do, the product range is much smaller.

Should you Transfer from Individual name to Limited Company?

It should be recognised that transferring existing properties from an individual name into a Limited Company structure may be more complex than purchasing new properties within. You would be liable to pay Capital Gains Tax and Stamp Duty Land Tax (SDLT) on the transfer, which tends to make this less desirable. On the other hand, this decision may depend on your future intentions since many landlords who want to expand their portfolio do so via a Limited Company structure, and may be willing to carry these one off costs to do so.

Tax Position on the Letting of a UK Property

For those of you living abroad unfortunately, although your salary may escape the UK tax net for a few years, the income from the rental of your UK property will not; and your Agents will be held liable for the tax thereon. They make provision for this liability withholding a proportion of the rents received each month, unless you are able to provide them with a banker’s certificate indemnifying then against the liability.

In order to assist you in your dealings with the Inland Revenue, we are pleased to be able to offer the services of our practice, a firm of chartered Accountants. With our expertise, we are in an excellent position to advise on every aspect of the letting. We will handle all correspondence with the Inland Revenue including assessments and appeals, advise with regards to payment and we will produce the final detailed statement of Income & Expenditure at the end of each tax year. All matters will normally be dealt with by correspondence or telephone, but if you wish, we can act through your Agents.

Our fee for these services will be £400.00 per annum (ex VAT) minimum, which is of course, deductible against your tax liability, as and expense of the letting. In addition, our practice is available to handle any other tax queries in connection with your relocation, including overseas taxes, double taxation relief and all the benefits attached to Non- Resident status.

Since 5th April 2016, the rules have changed. For 2016/17 Wear & Tear Allowance is 7.5%, for 2017/18 it is 5%, for 2018/19 it is 2.5% and in 2019/20 it ceases.

However you will get “Enhancement” Allowances for 2016/17 at 25%, for 2017/18 at 50%, for 2018/19 at 75%, and for 2019/20 at 100%.

In addition Tax Relief on the Mortgage Interest is limited to 20% Tax Relief.

In order to find out more about the tax services available, please contact our offices.

 

Table of Basic Estimation on Potential Income and Tax Liabilities for Property Letters


Example

£

£

Rent Receivable

12,000

Less: Expenses: -

Letting Agents Fees

1,200

AgreementCosts

45

Water and Sewage Costs

50

Wear & tear

1200

Ground Rent

Insurance's - Building

200

Insurance's - Contents

100

Accountancy

300

Depreciation (10% of the net rents)

1,200

Maintenance, decoration & repairs

50

Repairs to equipment (non Capital)

75

Mortgage Interest

5,000

Miscellaneous

9,400

Net Income

2,600

Less: Personal Allowance (assuming Commonwealth Citizen, resident & paid abroad)

7470

Net Income Subject to Tax

NIL


Proposed Property to Let: __________________________________

_______________________________________________________

_______________________________________________________


Client Estimate

£

£

Rent Receivable

Less: Expenses: -

Letting Agents Fees

AgreementCosts

Water and Sewage Costs

Wear & tear

Ground Rent

Insurance's - Building

Insurance's - Contents

Accountancy

300

Depreciation (10% of the net rents)

Maintenance, decoration & repairs

Repairs to equipment (non Capital)

Mortgage Interest

Miscellaneous

Net Income

Less: Personal Allowance (assuming Commonwealth Citizen, resident & paid abroad)

Net Income Subject to Tax

For further information about Goddards Accountants, please call us at our offices:

<u>Brixton Office</u>
		
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Brixton
		
London
		
SW2 5QN
		
<u>High Wycombe Office</u>
		
		
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Axis 40, Oxford Road,
		
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High Wycombe
		
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<u>Croydon Office</u>
		
		
c/o Technoestates
		
109 Church Street
		
Croydon
		
Surrey
		
CR0 1RN
		
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<b><u>Head Office</u></b>
		
		
Spirit House
		
8 High Street
		
West Molesey
		
Surrey
		
KT8 2NA<u></u>
		
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Tel: 020 8941 2187
Guide to Letting in the UK.pdf