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Buy to let – beware the financial pitfall!

‘Buy to let’ has grabbed the headlines recently with HM Revenue & Customs announcing a crackdown on landlords whose tax affairs may not be in order especially with regard to mortgage repayments.

In recent years more people have moved into this area of investment. And it is easy to see the attraction – investing in bricks and mortar is seen by many as a sound investment, combined with the relative ease by which finance can be raised.

But this is where problems can arise. The finance, or rather the repayments on the finance. Because, for the landlord you need to be sure that the rental income will cover the repayments plus any expenses on the upkeep of the property plus any tax liability.

Yes, tax! If you own the property personally, then you will be liable to income tax on the net rents after deduction of allowable expenses. If owned by a company, then the company will be liable to corporation tax on the net rents after allowable expenses.

Allowable expense includes interest on any loan to fund the purchase, repair, improvement or alteration of the property. But not the capital repayments. And this is where many people make a mistake. Thinking that all of the repayments can be used to set against the rents and then finding that they have a significant tax liability but insufficient money left in the rental income pot to cover this. So, do your sums carefully!!

The other thing to consider is how to secure the finance. If you own the property yourself, then whether you secure the finance against your home or the rental property is irrelevant for tax. As long as the finance was taken out to acquire the rental property, then the interest can be claimed as a deduction against the rents when calculating the income tax liability. If the company owns the property then the company needs to take out the finance, rather than you personally.

Don’t let the Taxman take 40% of your business!!!!

Business Property Relief (BPR) can reduce the value of a business chargeable to Inheritance Tax by up to 100%. Where a business consists wholly or mainly of the holding or making of investments then BPR will be denied. In which case, the value of the business will be liable to Inheritance Tax. One of the main areas where this occurs is where land or buildings are let out.

Many businesses may find that they no longer need all their premises for their own business and the logical step is to rent out surplus space. This can be particularly true for farmers who let out outbuildings as small industrial units. And, if BPR is denied then 40% of the value of your business will go to the tax man rather than your beneficiaries and this could mean that they would not be able to continue with the business.

There are steps that you can take in order to protect the BPR and enable you to pass your business on to future generations intact. However, it is important that action is taken sooner rather than later.

We can help

Unfortunately the UK tax system is getting increasingly complex… resulting in an increasing number of tax pitfalls for the unwary.  The good news though is that there are also many opportunities to pay much, much less tax… and in some cases none at all.

The key message is to seek advice early.  Many tax planning opportunities are only available if put in place before undertaking a transaction, such as the purchase of a property.

If you would like to discuss ways in which you may be able to make tax savings then please do not hesitate to contact us.

We would be delighted to advise you on any of the issues identified in this edition of “Pay less tax.”