Property investment – buy to let

Buy-to-let traditionally involves investing in property with the expectation of capital growth, with rental income from tenants covering mortgage costs and other expenses. If you live in the Nottingham area, we at AHACCOUNTANTS can help you navigate potential issues and structure your investment appropriately.

The UK property market, while cyclical, has proven to be a successful long-term investment, leading to significant growth in the buy-to-let sector. However, the gross return from buy-to-let properties (i.e., rent received minus costs such as letting fees, maintenance, service charges, and insurance) is no longer as attractive as it once was. Investors must consider whether capital appreciation will exceed inflation.

Factors to Consider

Do:

• Think of your investment as medium to long-term.
• Research the local market.
• Calculate your costs carefully.
• Consider high-standard decorations to attract tenants quickly.

Don’t:

• Purchase properties with serious maintenance issues.
• Rely on friends and family to manage the letting; a full management service is often more efficient.
• Cut corners with tenancy agreements and legal documentation.

Which Property?

Investing in a buy-to-let property differs from buying your own home. It may be beneficial to consult an agent to assess the local rental market, such as demand for two-bedroom flats or four-bedroom houses, and proximity to schools or transport links. An agent can also advise on the expected standards for decoration and furnishings to facilitate a quick let.

Agents

Letting property can be time-consuming and inconvenient. Tenants will expect quick resolutions to issues, like a broken heating system over a bank holiday weekend. Hiring an agent can relieve you of these responsibilities, including advertising the property and showing it to prospective tenants.

Tenancy Agreements

This crucial document clarifies the legal position for both landlord and tenant.

Taxation

When buying to let, tax implications must be considered.

Tax on Rental Income: Income tax is payable on rents received after deducting allowable expenses. These include repairs, agent’s letting fees, and an allowance for furnishings.

Restriction of Loan Interest Relief for Buy-to-Let Landlords: The income tax relief landlords can claim on residential property finance costs has been limited to the basic rate of income tax. Finance costs encompass mortgage interest, interest on loans for furnishings, and fees related to taking out or repaying mortgages or loans. Capital repayments of a mortgage or loan do not qualify for relief.

Landlords can no longer deduct all residential finance costs from property income. Instead, they receive a basic rate reduction from their income tax liability for these costs. This restriction does not apply to furnished holiday lettings or non-residential landlords.

Replacement of Furnishings: A relief allows landlords to deduct the costs incurred when replacing furnishings, appliances, and kitchenware in the property. This applies to a wider range of properties than previously allowed, providing relief for costs incurred in replacing items.

Eligible capital expenditures include:

• Furniture
• Furnishings
• Appliances (including white goods)
• Kitchenware

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 (where capital allowances are available) or if rent-a-room relief is claimed.

Tax on Sale: Capital Gains Tax (CGT) will apply upon the sale of the property. The tax is calculated on the disposal proceeds less the original cost of the property, certain legal costs, and any capital improvements. This gain may be reduced by any available annual exemption.

CGT rates generally are 10% within the basic rate band and 20% for higher rates. However, residential property disposals may incur 18% and 24% rates if they do not qualify for private residence relief.

CGT is payable on 31 January after the end of the tax year in which the gain occurs. Additionally, a payment on account of any CGT due from the sale of residential property must be made within 60 days of the completion of the sale.

Student Lettings

Investing in property for student lettings can be beneficial, especially if you have children in college or university. It’s crucial to structure this arrangement correctly. For example, the student should purchase the property (with the parent acting as guarantor on the mortgage), offering several advantages.

Advantages:

• Provides cost-effective accommodation for your child.
• Rental income from letting spare rooms to other students can cover mortgage repayments.
• If the property is the child’s only property, it may be exempt from CGT on its eventual sale as their main residence.
• Rental income is reduced by ‘rent-a-room relief’ (£7,500 per annum from 6 April 2016).

Alternatively, expenses can be deducted under normal letting rules if it proves more beneficial.

Furnished Holiday Lettings

Furnished holiday letting (FHL) represents another potential investment avenue, focusing on short-term holiday rentals rather than long-term residential letting.

NOTE: The Furnished Holiday Lettings regime is set to be abolished from the 2025/26 tax year, with minimal details currently available. This factsheet will be updated accordingly.

The favorable tax regime for FHL includes properties located in the European Economic Area (EEA). To qualify for FHL treatment, specific conditions must be met, including the property being available for letting for at least 210 days each tax year and actually let for 105 days. There is an option to elect to maintain FHL status for up to two years, even if conditions are not met, which is crucial for preserving the special CGT treatment.

Losses in an FHL business cannot offset other taxpayer income; separate claims for UK and EEA losses must be made, applicable only to profits of the same or future years.

Advantages:

• Opportunity for personal use or to share with family/friends while adjusting expenses accordingly.
• Generally more generous rules for allowable expenditures, including capital allowances on furniture.

Disadvantages:

• Higher agent fees, advertising costs, and maintenance expenses due to more frequent cleanings.
• Owning a holiday property can be time-consuming, potentially interrupting personal holidays.

If you would like further advice in this area, please get in touch.

Tax Allowance for Property and Trading Income

Two £1,000 allowances for property and trading income are available. If these allowances cover all of an individual’s relevant income (before expenses), they no longer have to declare or pay tax on this income. Those with higher income can choose to deduct the allowance from their receipts instead of deducting actual allowable expenses, applicable for Class 4 NICs as well.

The allowances do not apply to income subject to rent-a-room relief or partnership income from property businesses in partnership.

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