This is a guest contribution from Tyler Cooper , he has been building and managing a portfolio of buy to let properties for over 7 years now. He enjoys sharing his insights and ideas online through blogging. This post is suited for our UK audiences, who are property owners or going to be one soon.
Owning a property opens up a whole range of sometimes complex tax issues but it is not all bad news and there are several ways of making property investment as tax-efficient as possible.
For many investment items that you buy including property, you would normally need to Capital Gains Tax on some of the profit you make when you sell them. If you sell the home that you live in permanently, you should not be liable for CGT but it is a different story when it comes to rental property.
If you own a buy-to-let property, you might be able to claim rental property tax deductions to offset against your potential tax liability. This is just one of the ways that you might be able to minimise your final tax bill by using the various legal tax deduction options that might be available to you.
As with any general advice on tax issues and making allowable deductions, you should definitely take some professional advice if you are unsure what to do and your personal tax situation may well be different to someone else, which can potentially change or even limit the potential options that are open to you.
A simple and efficient way of minimising your income tax liability on any rental income that you receive is to make sure that you claim all of your allowable expenses.
The amount of taxable rental income can be reduced by a number of things including your mortgage interest paid, the cost of any insurance taken out, fees incurred for safety checks, letting agents and accountancy costs.
You can also claim against any repair costs incurred as well as council tax that you have had to pay, provided you keep accurate receipts as proof of all of these expenses.
As a general rule, HMRC will not allow you to claim any tax deductions for the cost of home improvements to the property although you might be pleasantly surprised by what HM Revenue and Customs will accept as a repair rather than improvement.
You will often find that HMRC will for example, accept that the cost of replacing single-glazed windows with double glazing, can count as a repair rather than an improvement, and would therefore be potentially allowable as a deduction.
If you own a flat that is furnished, you could be allowed to claim 10% of the rent you receive against tax, which you would class as wear and tear.
With any rental property, if you make a loss for any reason, you have the possible option of including it in your tax return and carrying forward the loss in order to set this amount off against any future rental profit that you make.
HMRC are being particularly proactive when it comes to people with a rental property portfolio and in order to maximise the potential for reducing your tax bill, you need to inform the tax authorities of any properties that you own and include rental income received on your tax return.
If you are higher-rate taxpayer, you will be charged at 40% tax on any rental profits and if your total rental income exceeds £15,000 per annum or more, you will be required to complete a full tax return, but any less any you may qualify for completing a shorter four page return instead.
Capital Gains tax
All the time that you are the owner of an investment property, you are attracting a potential CGT bill that you will have to pay when you sell the building.
You can choose to live in the property for up to 36 months and use it as your main residence, to gain some tax relief under the current rules. This can help reduce your Capital Gains tax liability but you should seek to clarify the position with an accountant or adviser to ensure full compliance and maximum benefit for the potential relief available.
Using a letting agent
If you use a letting agent to rent the property out on your behalf, they will be able to produce a record of the income that you receive during each tax year, less their fees.
If you are moving abroad and letting your property out, you could potentially remove the CGT liability by becoming a non-resident and stat outside of the UK for at least five consecutive years.
Whatever your tax position is, you should remember that there is also an annual CGT allowance, which this year was set at £10,900, so that can be used to reduce your liability along with the other options open to you.