For many, the lure of property extends beyond their own home, property being regarded by an increasing number of people as an alternative to their pensions. However, it is prudent to include property only as part of a well balanced investment strategy.
Either way, you should not miss out on any valuable tax breaks going when the property is eventually sold. For a straight investment property, the main benefit will be capital gains taper relief.
Once the property has been owned for three full years, the capital gain is discounted by 5 per cent with a further 5 per cent each year up to a maximum of 40 per cent after 10 years. This means that a higher-rate taxpayer would pay a maximum effective rate on the capital gain of 24 per cent. It is usually better than this because you take off the taper relief before any annual exemption is available. In addition, you can transfer an investment property between spouses without losing taper relief.
If one of you is only paying basic rate, the effective tax rate, even before annual exemptions, may only be 12 per cent. If you have let your property as a corporate rental to an unquoted trading company or business, you may qualify for the much more generous business asset taper relief which gives you a 75 per cent discount on your capital gain after only two years. This is something a lot of people forget to check when they are choosing tenants.
While these reliefs are very useful, the real saving comes if you have been able to treat the property at some stage as your principal private residence. For example, if you live in a house for a couple of years and then let it for a further three years before selling it, there will be no capital gains tax because the final three years will always be exempt.
So if you live in the property for two years and then let it out for eight years, five years will be treated as exempt (the first two and the last three years). On top of that you will be entitled to letting relief against your capital gain and this is available for each owner of the property.
Investment property
The taxman treats investment property in much the same way as any other business. You can claim tax relief against rental income for most of your running expenses, including repairs, agents' fees and any utility bills you pay, as well as a general allowance of 10 per cent of rental income for wear and tear if the property is furnished.
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The biggest expense, however, is likely to be mortgage interest. Interest is allowed in full against your rental income. This follows from the normal tax rules that apply to business, but it is important to show that the additional money borrowed has been used in your property-letting business.
Holiday homes
If you have a holiday home which you also let out, the tax rules are particularly favourable. In particular, if you make a loss you can offset it against your other income and the property will be regarded as a business asset for capital gains purposes. This means that you will only pay tax on one quarter of the gain after you have held the property for two years. To count as furnished holiday letting the property has to be available for letting to the general public for at least 140 days a year and be let for 70 days a year. It must also not be let for more than 31 consecutive days to the same person. Rather surprisingly, caravans can also qualify under the special rules.
Saving inheritance tax
If inheritance tax (IHT) is a concern for you, then buying a holiday property and giving an undivided share to your children would enable you to retain some control and most importantly, use of the property – but still remove the value owned by your children from your estate for IHT purposes.
In the case of a holiday home, provided that the children had their own keys so that both you and they could occupy the property, the gift was without strings and you both pay the appropriate share of the maintenance, you can both enjoy the property without triggering an income tax charge under the pre-owned assets tax regime, or having the whole value of the property included in your estate on your death.
If you would like to find out more, please email or contact us for further information. |
