#NICOKNOWS: Property Investment (BTL)


Buy to let traditionally involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.


At Nicholson Academy, we can help you sort out some of the potential problems that may arise and structure the investment appropriately.


In recent years, the stock market has had its ups and downs. Add to this the serious loss of public confidence in pension funds as a means of saving for the future and it is not surprising that investors have looked elsewhere.


The UK property market, whilst cyclical, has proved over the long-term to be a very successful investment.


This has resulted in a massive expansion in the buy to let sector.

Buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.

Find out more and book a 1-2-1 Masterclass with Paul Nicholson. www.paul-nicholson.com

However, the gross return from buy to let properties - ie the rent received less costs such as letting fees, maintenance, service charges and insurance - is no longer as attractive as it once was. Investors need to take a view on the likelihood of capital appreciation exceeding inflation.


Factors to consider


Do

think of your investment as medium to long-termresearch the local marketdo your sums carefullyconsider decorating to a high standard to attract tenants quickly.


Don't

purchase anything with serious maintenance problemsthink that friends and relatives can look after the letting for you - you're probably better off with a full management servicecut corners with tenancy agreements and other legal documentation.


Which property?

Investing in a buy to let property is not the same as buying your own home. You may wish to get an agent to advise you of the local market for rented property.

Is there a demand for say, two bedroom flats or four bedroom houses or properties close to schools or transport links? An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.


Agents

Letting property can be very time consuming and inconvenient. Tenants will expect a quick solution if the central heating breaks down over the bank holiday weekend! Also do you want to advertise the property yourself and show around prospective tenants? An agent will be able to deal with all of this for you.


Tenancy agreements

This important document will ensure that the legal position is clear.


Taxation

When buying to let, taxation aspects must be considered.


Tax on rental income

Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include repairs, agent’s letting fees, an allowance for furnishings and a proportion of the mortgage interest.


Restriction loan interest relief for 'buy to let' landlords

Rules have been introduced which restrict the amount of income tax relief landlords can get on residential property finance costs to the basic rate of income tax.

Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.


Landlords are no longer able to deduct all of their finance costs from their property income. They will instead receive a basic rate reduction from their income tax liability for their finance costs.


To give landlords time to adjust, the change is being introduced gradually from April 2017, over four years. The restriction in the relief is being phased in as follows:

in 2017/18, the deduction from property income is restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reductionin 2018/19, 50% finance costs deduction and 50% given as a basic rate tax reductionin 2019/20, 25% finance costs deduction and 75% given as a basic rate tax reductionfrom 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.

This restriction does not apply to landlords of furnished holiday lettings.


Replacement of furnishings

A relief enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property. Relief is due on the cost of replacing furnishings to a wide range of property businesses.


This measure gives relief for the cost of replacing furnishings to a wider range of property businesses as previously there was no tax relief for the replacement of furnishings in partly furnished or unfurnished properties.

Examples of eligible capital expenditure are:

furniturefurnishingsappliances (including white goods)kitchenware

but excludes items which are fixtures.

However the relief is limited to the cost of an equivalent item if there is an improvement on the old item.


The deduction is not available for furnished holiday lettings or where rent-a-room relief is claimed.

Find out more and book a 1-2-1 Masterclass with Paul Nicholson. www.paul-nicholson.com

Tax on sale

Capital gains tax (CGT) will be payable on the eventual sale of the property. The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property.


This gain may be further reduced by any annual exemption available and is then taxed at either 18% or 28% or a combination of the two rates.


CGT is generally charged at 10%, within the basic rate and 20% for higher rates. However 18% and 28% rates apply to chargeable gains arising on the disposal of residential property that does not qualify for private residence relief.


CGT is payable on 31 January after the end of the tax year in which the gain is made.

From April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief.


Student lettings

Buy to let may make sense if you have children at college or university. It is important that the arrangement is structured correctly. The student should purchase the property (with the parent acting as guarantor on the mortgage). There are several advantages to this arrangement.


Advantages

This is a cost effective way of providing your child with somewhere decent to live.

Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments from a cash flow perspective.


As long as the property is the child's only property it should be exempt from CGT on its eventual sale as it will be regarded as their main residence.


The amount of rental income chargeable to income tax is reduced by a deduction known as 'rent a room relief' (£7,500 per annum from 6 April 2016). In this situation no expenses are tax deductible.


Alternatively expenses can be deducted from income under normal letting rules where this is more beneficial.


Tax allowance for property and trading income

Two £1,000 allowances for property and trading income are available.

Where the allowances cover all of an individual’s relevant income (before expenses) then they no longer have to declare or pay tax on this income. Those with higher amounts of income have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 NICs.


The allowances do not apply to income on which rent a room relief is given. Neither do the allowances apply to partnership income from carrying on a trade, profession or property business in partnership.


The trading allowance may also apply to certain miscellaneous income from providing assets or services to the extent that the £1,000 trading allowance is not otherwise used.


Find out more and book a 1-2-1 Masterclass with Paul Nicholson. www.paul-nicholson.com
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