With the Conservative party now secure in Government for another five years, there has never been a better time to get your tax affairs in order. The Conservatives ruled out rises in corporation tax, VAT, National Insurance and Income Tax but, with the mandate given to them by the British public to plug the national deficit, there is a concern that other taxes could be targeted including those in real estate such as stamp duty land tax.
The buy-to-let market in the UK has grown significantly in the last decade and is unlikely to slow down under a newly elected Conservative government. Recent figures show that there are now over two million private landlords in the UK who own and rent out five million properties. However, these new landlords and seasoned property investors need to be aware of a number of tax pitfalls and reliefs to ensure they get the most from their investments.
Andrew Stanley, specialist property tax adviser says: ‘Not every new landlord is given the proper advice at the point of sale or purchase and this can result in substantial losses, sometimes tens of thousands, perhaps even hundreds of thousands of pounds in lost tax relief.’
Top tax tips for property investors include:
Capital Allowances – use it or lose it!
Commercial property owners and some owners of large residential buildings can claim capital allowances to write off the cost of things bought for use within their business against their taxable profit. In a building this can include things like fitted carpets, electrical systems and even the heating/hot water systems.
In 2014 new legislation kicked in that could block property owners from claiming their entitled tax relief. Now, if capital allowances are not correctly pooled and transferred when a building is bought or sold then the opportunity to claim on them can simply disappear and in extreme cases trigger unexpected tax charges.
However, providing purchasers of a building have a savvy tax specialist at their side these risks can be avoided. In many historic cases it is not too late to claim if the right advice is sought as soon as possible.
So make sure you take this into consideration if you are buying or selling.
Multiple Dwelling Relief (MDR)
Property investors purchasing more than one residential property at the same time from the same seller (e.g. a block of flats) or multiple properties in a linked transaction could be eligible for MDR.
MDR changes the way stamp duty works in the investor’s favour, calculating the rate payable on the properties’ average value (their total value divided by number of properties purchased – note the minimum rate is 1 per cent). This is still payable on the total consideration but paying, for example, an effective rate of 1per cent is a lot better that 4 per cent.
This can save property investors, businesses and private individuals a lot of money. Unfortunately MDR is not a particularly well known form of tax relief and often escapes the observation of conveyancers overseeing the transaction. This could mean investors are entitled to compensation for negligent legal advice relating to unclaimed tax relief, a potential windfall of tens or even hundreds of thousands of pounds.
So, if you’re buying more than one residential property at a time make sure you claim MDR.
Consider going fully furnished to claim a 10% tax relief
In 2012, HMRC announced that the renewal allowance for the replacement of white goods was to be scrapped. This was not good news for landlords of unfurnished or partly furnished properties, as this was the only tax relief available for the replacement cost of freestanding white goods such as fridges and ovens.
However, if the property is let fully furnished then the landlord can claim a 10% wear and tear allowance. This could be well worth the cost of the beds, sofas, chairs and tables needed to bring the property into the fully furnished bracket.
Don’t fall foul of ATED
Annual Tax on Enveloped Dwellings (ATED) is applicable to buildings owned by a ‘non-natural person’ (defined as including companies, partnerships with corporate members, LLP or other collective investment vehicle). ATED is payable by companies that own UK residential property (a dwelling) valued above a certain amount.
This was originally set to only catch the most expensive homes valued at £2m+. As often happens though, little by little the threshold has been travelling downward towards £500,000, bringing many more buildings into this tax bracket.
Reliefs are available for numerous entities (developers, professional investors etc) but the vast majority still need to file a return to claim these reliefs even if there is nothing to pay. Not doing so can trigger penalties.
If you hold property in any other way, other than in your own name, it is worth checking with a specialist to see if there is anything you should be sending to HMRC… before the penalty notices turn up.
Consider how you’re going to own the property
This might sound like an obvious piece of advice, but property investors need to consider how they will own the property and ensure they’ve got it right for their medium and long term objectives. For example, a rental investment might be better owned by a limited company rather than being put in your own name.
Changes further down the line can be expensive from a tax point of view, e.g. capital gains, stamp duty etc. So choosing the right vehicle for your objectives from the outset is the best way to go.
In summary, property investors need to get their affairs in order when it comes to tax. Those that don’t could find themselves in a very different place financially to where they wanted to be. Property tax isn’t always simple and getting the proper advice is vital to achieving your goals.