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Top tax tips for property investors

The prevalence of television shows which follow the fortunes of people who buy and sell houses has been mirrored by an increasing number of people choosing to invest in property. When interest rates are low and you want your savings to work harder than they would in a bank account, a buy-to-let opportunity can seem like a relatively low-risk way to get a good return on your investment, especially for those who are concerned by the volatility of the stock market.

There are many things to consider when deciding whether you are in a position to invest in property, and one of the main ones is whether you want to invest directly or indirectly. Direct investment is when you buy a property yourself and indirect investment is when you buy into a property fund which pays out a percentage of the profits to everyone who has put money in.

Either way, you will need to consider your financial position carefully as there are a number of tax implications to either option which you will need to know about. Whether you are considering property investment as an additional source of income, or thinking of going into business for yourself, consulting an accountant should clarify the relative merits of all your available options.

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Indirect investment

This can be a great way to enjoy the financial rewards of investing in property for a minimal time commitment. Certain types of scheme attract tax breaks which allow those involved to reclaim certain portions of tax paid, and if you want to understand which option is most suitable for you then speaking to an accountant could help you with the calculations.

There are varying degrees of risk involved in any investment, so you must ensure that you fully understand all the possible outcomes when you decide where to invest. Any legitimate property fund should be registered with the Financial Conduct Authority so check with them before you commit to anything and consult your accountant about any aspect of investment that you want explained in further detail.

Direct investment

If you are going it alone and buying a property to manage yourself, then there are some important things to consider, such as where to buy, what kind of property and what are your long term plans. Some people prefer to buy houses which need a lot of work doing to them in order to renovate them before either selling them or letting them out. This can be a great option for anyone who has skills which they could use to help them complete their project, such as builders, electricians, carpenters and other tradespeople who will be able to take advantage of their knowledge and contacts to get the job done.

In this way, it is possible to really maximise your potential profits by increasing the value of your property in the long term as well as increasing the potential rental value for the short-term. However, it is worth noting that not everything you spend on a rental property will be allowed as expenses when it comes to completing your tax return. Costs for repairs and general household maintenance are allowed, but for major works you will be unable to write these off against tax so make sure you make a distinction between the two in your records.  

Time is of the essence

Once you have bought a property, the time in between your purchase completing and your first tenants moving in could be costly, even if you don’t need to spend much on the house itself. You may get a discount on your council tax bill, depending on your local council‘s rules, but you will still have to pay at least some proportion of the normal rate even if the house is unoccupied. You will also need to pay your mortgage, and although you can write off the interest as an expense on your tax return, unless you negotiate a payment holiday with your mortgage provider you will still have to make your repayments even if the property is vacant.

There are different types of direct investment, and the way tax is applied varies depending on how you are collecting your rental income: holiday lets, residential lettings or renting rooms under the Rent a Room relief scheme.

Holiday Lets

If you rent out a furnished property to holiday makers, then there are certain conditions under which you will be allowed to claim back your expenses so long as they meet the criteria. Your property must not be let for more than 31 days at a time, it must be in the European Economic Area and the property must be available to be let for at least 210 days a year and actually occupied for at least half of that time.

If this describes your property, then you will be entitled to claim allowable expenses, and you may also be able to claim an allowance for either furnishing or maintaining the fixtures and fittings already there. You cannot claim an allowance for wear and tear however, so you may need to seek advice as to how your outgoings would be classified.

Residential Lettings

If you rent out a property for someone else to live in as a permanent residence, even if it is relatively short-term, then you will declare this as normal income and be taxed at the prevailing rate on your profits. You need to ensure that you calculate your profits accurately, and because you can deduct allowable expenses as well, you will need to keep detailed and accurate records of anything you spend on fees, insurance and outgoings such as council tax. You can also deduct a certain amount for either wear and tear of the furniture or for renewing furniture if you let the property as a furnished rental. You cannot claim an allowance for the initial furnishing of the property, to be sure to distinguish your start-up costs from any ongoing replacement or repair costs.

Rent and Room Relief Scheme

If you use your own residence as a rental property by letting rooms to lodgers, then you may qualify for the Rent a Room Relief Scheme if you are just renting out a room in your house and sharing facilities with your tenant. Separate flats which are self-contained do not come under the scheme, so would be treated like normal residential lettings. The Rent a Room Scheme is designed to save you money, but it depends on your situation as to whether it actually represents good value. You don’t have to pay any tax on the first £4,250 you earn from your rental, but there are no allowances for wear and tear, and if you make a loss, you cannot deduct this from your other taxable income to reduce your liabilities.

For those who will earn less than £4,250 in rent, then no tax will be payable at all, regardless of your other income, but if you earn more than £4,250 then you will pay tax on the excess even if your expenditure means that you didn’t make a profit. Because of this, anyone who expects to spend more than around £4,000 in expenses may not save money by using the relief scheme, and it is worth noting that the allowance is per house not per owner, so if the property is owned by more than one person then the allowance is divided between them.

Allowable expenses

There are a range of things that you can claim as expenses when it comes to your annual tax return, although it is always best to check whether they apply in your case. These include:

  • Mortgage interest charges (although not capital repayments)
  • Insurance on your property, including buildings, contents, loss of rent and any fees payable on claiming on a policy
  • Letting agent fees
  • The cost of advertising for new tenants
  • Accountancy expenses associated with the financial management of the property business
  • Legal and any other professional fees incurred in the management of a rental property, which can include charges made for preparing inventories and contracts, the costs associated with collecting rent and more
  • Window replacement
  • Cleaning
  • Contracts for regular maintenance such as servicing the gas supply
  • Routine repairs, so long as they do not represent a major improvement to the property which can include decorating, repairs to the roof and guttering, damp treatment and repairs to fixtures or fittings
  • The provision of utilities such as gas, electricity and water
  • Charges levied by freeholders or leaseholders for regular maintenance
  • Council tax if the property is available to let but without a current tenant
  • Ground rent

It is always worth consulting an expert for advice and information about how you can maximise your tax efficiency when it comes to an investment property. Like any investment, there is some degree of risk, and taking proper financial advice is paramount, not only to protect yourself as much as possible but to ensure that you are keeping your costs to a minimum. HMRC provides information about the taxes which you might be liable for, but these can be complicated and depend on your precise situation. An accountant will be able to look at your plans and advise you on the best way to maximise your investment potential whilst keeping your outgoings to a minimum.

If you are thinking about making a property investment and would like to speak to an accountant, please call us on 01442 275767 or email newbusiness@easyaccountancy.co.uk

Now that you know a bit more about the ins and outs of property investment you may also find the following pages useful:

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