To buy a property, you can use your own cash or take out a buy-to-let mortgage with a cash deposit, minimum 25% of the property value.
Once you buy a property, you can potentially earn a profit in two ways:
Rental yield – what your tenants pay in rent, minus any maintenance and running costs, like repairs and our fees.
Capital growth – the profit you earn if you sell your property for more than you paid for it.
To access your money, you’ll need to sell the property or take out a mortgage. Both options take time, prior to investing you will need to asses the financial implications of having your money tied up in property.
If you let out a property in the UK, tax may payable on the rental income you receive. You will need to declare this income on your Self Assessment Tax Return. Remember – if the property you are letting is jointly owned there will be tax allowances for both parties you should only be taxable on a proportion of the income you receive but both parties may need to complete a Tax Return.
HMRC legislation states that you will need to keep records of your income and expenses relating to the rental property for at least six years to support your Tax Returns.
We will provide you with copies of contractor’s invoices as part of our normal service and can also provide an annual statement of your account upon request.
For full and complete advice we recommend seeking the advice of an accountant. They can give you professional advice on your personal tax position and ensure you maximise your savings.
Mortgage Interest Relief
Over a period of four years from April 2017, tax relief on buy-to-let mortgage interest payments is gradually going to be slashed. By 2021, it’ll be set at 20%, regardless of which tax bracket you’re in.
Up until now, landlords paying higher (40%) or additional (45%) rate tax could claim tax relief at their highest rate, but the Budget changes mean that tax relief can only be reclaimed at the basic rate (20%), regardless of the rate of tax the landlord pays.
Incorporating your property/portfolio in a limited company:
From April 2017 the treasury will start phasing in changes which will, in time, see landlords pay tax on the entire rental income generated from their rental property/portfolio.
You could incorporate your property/portfolio in a limited company structure. You would then pay corporation tax (which is lower) rather than income tax on your profits. Corporation tax is currently a flat rate of 20%, which will drop to 19% in April 2017 and 18% by 2020.
This set up is particularly useful for higher and additional-rate taxpayers.
A drawback is that your mortgage options will narrow as fewer providers will lend to a company.
The long term benefits can be advantageous although the setting up procedure is a far from simple process, and there are several pitfalls that need to be avoided along the way.
How to get started:
We would recommend speaking to an accountant prior to setting up a property company or ‘special purpose vehicle’
Buying a buy-to-let property through a company is a similar process to buying as an individual. Stamp duty applies in the same way, including the additional 3% levy on buy-let-let and second home purchases.
If you’re already a buy-to-let landlord wishing to benefit from the tax savings offered by incorporating your property/portfolio within a limited company you will need to transfer your existing property/ portfolio into a company. THIS HAS ITS OWN TAX IMPLICATIONS.
Due to money laundering regulations, the property has to be sold at market value. This has capital gains tax implications as well as potential stamp duty costs when the property is bought through the company.
If the property has increased in value since it was purchased, capital gains tax may be payable on the profits also.
Specialist lenders offer buy-to-let mortgages for companies, and it’s easier to get a mortgage with a special purpose vehicle, which only holds properties, than a trading company, which carries out other business. This is because special purpose vehicles/property companies are regarded as less complicated and easier to underwrite.
Mortgages for incorporated companies used to be significantly more expensive because the underwriting costs are higher due to the more expensive process of checking out the company and the individuals involved. For more information please contact our recommended financial advisors, RDP Financial Services - 01702 442198.
How to manage your property company:
Once you’re incorporated, you have some responsibilities that you did not previously have as an individual property investor.
Instead of doing an annual self-assessment, businesses are required complete annual returns and accounts. You may wish to employ an accountant to ensure this process is completed accurately.
Incorporating is a good option if you are looking to leave your rental income to accrue without withdrawing it, for example to use as a pension.
When you do come to dissolve the business and close the company, you could take an additional tax hit. Your profits will be taxable within the company and again when you take the money out you will have to pay tax at either your dividend rate or as capital gains tax.
Without liability are pleased to recommend:
Geiss Wallis Crisp Accountants,
10/12 Mulberry Green,
Telephone : 01279 427431
Tax for Non – Resident Landlords
HMRC legislation requires UK letting agents to deduct income tax at a current basic rate from a landlord’s gross rental income. The withheld tax is then passed to HMRC. You can, however, apply to HMRC to receive your rental income free of any tax deductions by completing the NR1approval form.
Once authorisation has been received from HMRC then we can pay rental income without deduction of tax.
Further information on the taxation of rental income for both UK and Non Resident Landlords is available by clicking the following links: