Tax implications of the buy to let market

The UK's property rental market has continued to grow in recent years thanks to strong investment in the buy-to-let market coupled with a relaxing of people's attitude to renting. Add this to the low interest rates currently available and there are strong incentives to jump on the bandwagon.

However, before doing so, it is worth bearing in mind the short and long term tax implications in order to ensure that maximum benefit is derived from ownership of the property.

Any profits generated from letting a property are added to the taxpayers other income and taxed accordingly. So for a basic rate taxpayer, the profits will be taxed at 22 per cent whilst for a higher rate taxpayer the rate will be 40 per cent.

Where a property is jointly owned, it may be worth considering allocating a greater share to the person with the lower tax rate in order to reduce the overall liability.

The profits are calculated by Chartered Certified Accountants and Registered Auditors Accounts for sole traders, partnerships and limited companies deducting from the rental income all expenses incurred in connection with renting the property.

These commonly include items such as repairs, maintenance, gardening, agents commission and also the interest element of any mortgage used to purchase the property.

In addition, where the property is let fully furnished, a 'wear and tear' allowance of 10 per cent of the rental income can be claimed.

In the long term, on the eventual disposal of the property, capital gains tax is payable on any gain made which is calculated by deducting the purchase price from the sales proceeds but it is worth remembering that any costs associated with buying and selling the property can also be deducted, including solicitors fees, stamp duty and advertising costs.

If the property has previously been your own private residence, additional reliefs are available which in many cases result in significant reductions to the taxable gain.

Of course, whatever the taxation implications may be of owning a rental property, the old adage always applies, "don't let the taxation tail wag the commercial dog".

So first and foremost the property has to be a sound investment regardless of the tax reliefs and allowances that may be available.

Should you wish to discuss in more detail any of the matters raised above, please contact either Danny Mehta or Basit Ahmad on 01344 627517 or office@mehta-co.com. Statutory and non-statutory audits. Self assessment tax returns. Personal tax planning. Corporate tax compliance and planning. Bookkeeping and payroll services. Financial planning and management consultancy.