Buy To Let Mortgages

Tax Implications of Buy to Let

Nobody really likes to think about taxes. But, unfortunately, where buy to let is concerned, there are a range of taxes that need to be considered when budgeting for your growing portfolio. Generally, the following taxes will have to be dealt with and planned for as part of a buy to let investment:
income tax; and
capital gains tax.

Income Tax
In its simplest form, income tax is payable on rental income, in the same way as any other type of income that you receive. For example, if you are in the 22 percent tax bracket, you will pay income tax on any rental income at the rate of 22 percent. Bear in mind that if you are receiving an alternative income which is anywhere near the 40 percent tax rate point of £33,301 (currently), then the rental income may push you into the higher income tax band and result in you paying 40 percent tax on your rental income.

Not all of your rental income will be taxable, as certain expenses can be deducted from the income before it is used to complete the tax calculation. These include: interest payments on the mortgage, up to 10 percent for replacement furniture in a furnished buy to let, maintenance costs, letting agent fees, accountant’s fees and repair and maintenance costs.

Capital Gains Tax
Perhaps the most dreaded of all taxes! Every individual in the tax year 2006 / 2007 will have a personal allowance of up to £8,800 for any gain made in that year. Therefore, if you own the property jointly with another individual, the first £8,800 of gain EACH of you receives will not be taxable. From then on, the capital gain is added to the income received that year and taxed at the appropriate rate which is 10 percent, 20 percent or 40 percent.

Capital gain is defined as the selling price minus the purchase price, purchase expenses, sale expenses and any taper relief and indexation allowances available. Taper relief is a reduction based on the length of time the property has been owned and indexation allowance accounts for inflation.

Taper relief is incredibly complicated, but the theory is that, depending on how many years the asset has been held, then a certain percentage of the gain can be discounted. With a non-business asset, after 3 years, 5 percent of the gain will be discounted; this increases up to 40 percent after 10 years. With a business asset, after 1 year 50 percent of the gain will be discounted and from 2 years, 75 percent of the gain will be discounted.

Note that a furnished holiday let is considered as a business asset and as well as the potential 75 percent reduction, the maximum tax rate will be 10 percent, making this a huge plus for a furnished holiday let investor. In order to be considered as a furnished holiday let, the property must be located in the UK, furnished, let out for a period of at least 70 days and available for letting for at least 140 days per year. No single let can last more than 31 days.

Summary
Tax for a buy to let investor is a complicated and potentially very expensive part of the business;
income tax and capital gains tax planning can substantially reduce the costs incurred and professional advice is essential at all stages of the planning.