Recent trends in the housing market have served to boost the popularity of investing in property – while also leaving an increasing number of homeowners liable to taxes such as inheritance tax (IHT)
Property ownership has a number of different tax implications, which is why it is essential to put in place adequate tax planning measures now. This guide sets out some of the key aspects of tax and your property.
Capital gains tax
Your main residence is exempt from capital gains tax (CGT) when you sell it, provided it has been your only or main residence during the whole period of ownership. Various rules allow periods of temporary absence to be disregarded.
Owning more than one property
If you have more than one home, you may elect which is to be your main residence (i.e. exempt for CGT) within two years of acquiring the additional residence. As long as a home has at least some time been your main residence for CGT, the last three years of ownership are added to your exempt period. It may be beneficial for a married couple to own the non-exempt residence jointly as each will be entitled to capital gains tax exemption, on sale of the property.
If the purchase and sale of properties amounts to a trade then profits will be taxed as income in the normal way. In all other cases, disposal will be subject to the normal rules for the calculation of capital gains.
The situation may be complicated where a principle private residence has been let for some time during the period of ownership
Expenses allowable in calculating income include interest incurred on loans used towards the purchase of the property (adjusted for any part of private use), rents, rates, insurance, repairs, management and professional fees.
Expenses on improving the property (such as extensions), or those which were necessary to bring newly acquired property to a useable state, all form part of the capital cost of the property.
Tax aspects of property investment
Income arising from land and buildings is generally treated as investment income unless it is from furnished holiday lettings or from property development, or the provision of services such as hotels and guesthouses, in which case it would be classified as trading income. From an accounting and tax point of view, all rental income (except furnished holiday lettings) is treated together as from one ‘property’ business, regardless of the terms of letting. Profits and losses are calculated using the same general accounting rules as for trading, including accruals to cover the timing difference of rent or expenses in advance or arrears.
Allowances for equipment
In general it is not possible to claim capital allowances for fixtures and fittings in a dwelling house. By concession, an allowance is available to cover wear and tear on certain items (such as suites, beds, carpets, curtains, linen, crockery, cutlery, cookers, washing machines, and dishwashers). For such items it is possible to claim either the cost of replacement (not original purchase) or alternatively a global annual wear and tear allowance equal to 10% of the rents received (less certain expenses) on furnished lettings. It is also possible to claim a deduction for the costs of renewal of fixtures, such as baths, toilets and washbasins.
For commercial properties, capital allowances may be claimed in respect of plant and machinery supplied by the landlord.
VAT on land and buildings is a complicated area. Generally sales of commercial buildings less than three years old are standard rated, sales of new residential properties are zero-rated and most other sales and leases are exempt. The VAT provisions on property letting are particularly complex.
If your thinking about investing in property for your business, or just so a bit of extra income on the side, then get in touch so we can discuss the best way for you to proceed.