Buying a Buy to Let Property (BTL)
This is a fairly hot topic area given low interest rates, a demand for rental properties and more and more high street banks moving into the BTL market. As well as the traditional buy to let mortgages, there are also share appreciation schemes available allowing borrowers to mortgage an agreed proportion of their property interest free and in return the lender receives an agreed percentage of any capital increase in the property, on its eventual sale.
Owning a BTL Property – Income Tax
BTL property income must be declared in a Tax Return (even if no profit is made) and is taxed at the individual’s marginal rate (up to 45%). Examples of expenses which are deductible for tax purposes are:
- maintenance and repairs
- utility bills and council tax
- accountancy and insurance
- rent arrears
- mortgage and loan interest
- agents fees
Net losses after the deduction of allowable expenses can be set against property income in future tax years (rules apply).
Selling a BTL Property – Capital Gains Tax (CGT)
CGT is payable on the sale of a property which is not a main home. The rate is either 18% or 28% of the gain (proceeds less costs) depending on taxable income. Individuals have an annual CGT allowance of £10,900 per year (for 2013/2014), which means the first £10,900 of gain is tax free. Allowable expenditure can be deducted from a gain to reduce a liability such as the costs of professional fees for acquisition, valuation and disposal. In addition, enhancement expenditure, such as the cost of an extension, can be deducted.
Estate planning – Inheritance Tax (IHT)
The value of a BTL will form part of the deceased owner’s estate and will therefore be subject to IHT if the estate is taxable – the mortgage secured on the property will be deductible for IHT purposes. The Government did look at restricting the set off of loans for IHT purposes but have partially reversed its attack on debt relief. Instead it has targeted relevant business property. A BTL is not relevant business property and is therefore not caught by the new debt relief rules.
Business Property Relief (BPR)
Relevant business property is exempt from IHT. New rules introduced this year affect arrangements whereby loans secured against family homes are used to buy assets which qualify for BPR. Arrangements put in place after 5 April 2013 no longer produce a favourable outcome as the loan has to be attributed to the business asset that it has been used to buy.
If you would like to discuss the purchase of a BTL property or if you have any questions arising from this article, please do call.