When considering the possibility of letting a residential property it is important to understand the tax implications. As the owner of a buy to let property you will be subject to income tax on the difference between the rental income you receive and the costs you incur. Where you own the property jointly any taxable profits generated from the property are split between you based on the proportion of the property you own.
From a tax planning perspective it can be more beneficial for the individual who has less taxable income to own the larger proportion of the property resulting in a lower overall tax position. This may not always be the right decision based on the level of investment each owner makes. However, where the investment is contained within a family group then there is generally more flexibility as to how things can be structured.
Where the property is owned between you and your spouse or civil partner the split of income is automatically 50/50 irrespective of how the beneficial ownership of the property lies. Where the property is purchased in a different proportion, say 80/ 20, then the only way the income will be taxed in this manner is if an election is made to HM Revenue & Customs. This election needs to be made within 60 days of the beneficial ownership changing. If the election is not made in time, in certain circumstances it may be possible to restart the election period but care will need to be taken to ensure that you do not trigger any unnecessary tax charges.
In order to minimise your tax liabilities you need to ensure that you are deducting all the appropriate costs. The type of costs you can deduct against your rental income include agent fees, insurance, mortgage interest, repair and maintenance costs, gas safety certificates and similar fees and any other expenses which have been incurred specifically for the running of the property.
As well as expenses incurred whilst there is a tenant living in the property you are also, in some case, able to deduct expenses against any rental income in the periods of non-occupation. Costs in preparing the property for letting are generally allowable and accounted for as if they were incurred on the first day the tenant moved in. Expenses relating to the general maintenance of the property in between tenants are also allowed where you are simply decorating the property to bring it up to the standard it was before the previous tenants moved in.
Capital expenditure is not deductible against rental income but instead will be relievable when the property is sold. Differentiating between revenue and capital expenditure can sometimes be very difficult. It is always very important therefore to consider any repair and maintenance work carried out on the property in detail before a claim is made.
Regardless of the type of expenditure incurred it is always important to keep copies of the relevant receipts to support any claim made.
It is not uncommon for situations to change within a family such that one spouse’s income increases or you are looking to include another family member, such as your children as the owner of the property so they can benefit from the income it generates. Careful planning can mean that changes can be made with minimal tax consequences but professional advice should be sought. Generally husband and wife transfers are exempt from taxes however where a property has a mortgage attached the transfer of a share in the property could lead to Stamp Duty Land Tax charge. It is also advised to speak to the mortgage lender before a change in ownership arises as there may be issues that you have not considered.
When you come to sell the property Capital Gains Tax may be payable on any profits you make. There may be reliefs that you can benefit from providing some careful planning is undertaken. Where you are married or in a civil partnership then as a minimum you may wish to consider transferring a proportion of the property to the other person to benefit from their capital gains tax exemption, currently £11,000.
Make sure you take full advantage of the tax saving opportunities open to you.
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