Buying a buy to let property

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
  • advertising
  • 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.

 

Voluntary First Registration of property

In this article we deal with Voluntary First Registrations and Reduced Land Registry fees.

As part of a continuing drive to promote the voluntary first registration of those remaining unregistered properties, the Land Registry offer a reduced fee for voluntary first registration applications. By way of background, the majority of properties are now registered with the Land Registry which means that title details and evidence of the ownership are lodged with the Land Registry and guaranteed by them.  There are certain trigger events, such as sales, which result in the compulsory registration of properties and in recent years many properties have therefore been registered.  If, however, your property has not been sold or changed hands for many years then it is possible that it is unregistered and it is worth considering whether to make a voluntary first registration application.  There are numerous benefits to proceeding with a voluntary first registration:

–     Storage – the Land Registry will electronically store the title details negating the need to keep the title deeds lodged in a strong room or bank for safe keeping;

–     Protection – registration is the best way to protect your ownership and ensure that the Land Registry requires your involvement in any sale or mortgage of the property;

–     Protection – registration minimises the risk of future adverse possession (“squatters’ rights”) claims;

–     Future Sales – it ensures that any queries over your title can be resolved prior to any future sale:  sales can be held up or even fall through due to queries over the title which could have been resolved in advance by voluntary registration;

–     Getting your affairs in order – registration means that your property affairs are in order and will be more straightforward for your Personal Representatives to deal with.

If you would like to discuss the possibility of a voluntary first registration application then do contact us for a no obligation conversation and we will be able to give you an estimate of the legal fees and Land Registry fees payable.

 

What happens to my property if I don’t make a Will?

By way of an example, husband dies leaving a wife and two children under 18.  He owns a house in his own name worth £375,000 and has savings worth £100,000.  The mortgage on the house is covered by an insurance policy and so the total estate is £475,000.  He had been thinking about making a Will and had expressed the wish that the whole of his estate should pass to his wife but if she had died before him, a trust for the children with capital passing to them at age 30.  Unfortunately he never got around to doing a Will and on his death the Intestacy Rules were applied:

  • The wife gets a legacy of £250,000 which is less than the value of the house.  She also gets the contents of the house and any car which her husband owned.
  • What is left is divided in half.  The wife gets the income from one half and the other half will be invested and paid to the children when they reach 18.
  • On the wife’s death the money held for her goes to the children.  For as long as the children are under 18, the rules cannot be varied without a Court Order.

On the figures given in the example, the wife does not get the whole of the value of the house.  This is all very different to what the husband intended – namely that everything went to his wife.  He was also thinking of putting the house into joint names with his wife, but did not get around to doing it.  Had he done so, this would have made life easier for the wife as his widow.

So how could life have been made easier for the wife?

The husband died without a Will and the intestacy rules applied.  The house was in the husband’s sole name and in such a situation his wife would receive £250,000 and a life interest in £112,500, to be held on trust (based on the figures in the last scenario).

The position would be very different had the house been held in joint names as tenants in common (i.e. both husband and wife each owning a divisible 50% share).  In which case, only half of the house would be subject to the intestacy rules (the husband’s share).  Using the same figures, the wife would be left with £437,500 and a life interest in £18,750 (held on trust).

Alternatively, and perhaps the most favoured position (dependant on personal circumstances) would be if the husband made a Will.  In which case, the husband could leave all property he owned to his wife.  In this case, the wife would receive £475,000 outright (no trust).  The house could also have been held in joint names as joint tenants.

If you have any queries relating to Wills or the way in which property can be owned, do contact us.