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October 2004

BUY TO LET TAX PLANNING

Individuals thinking about entering the buy-to-let property market should make themselves aware of the tax implications of renting out to make the most of their investment, as Steve Mitchell, project manager at Acumen Accountants & Advisors in Aberdeen and Peterhead, explains.

There are two main tax liabilities for those in the buy-to-let arena: tax on rent and tax if a property is sold for more than it was bought. The type of taxes and allowances available to buy-to-let homebuyers directly depends on the ownership status of the property. There are four main models of ownership, each of which have tax advantages and disadvantages:

1. Property owned by individual(s) where rental income is taken as individual income. Landlords in this situation will be able to use the annual capital gains allowance (currently £8,200) to offset against any gain when the property is sold. The main disadvantage is that rental income will be added to the landlord’s other income and will be subject to Income Tax at rates of up to 40%.

2. Property owned by a company where rental income is taken as company income. Here the main benefit is that rental income will be subject to Corporation Tax and the rates of this will probably be less than Income Tax. The landlord, however, will not be able to use the annual capital gains allowance to offset against any gain when the property is sold.

3. Property owned by individual(s) where rental income is channelled through a company to become company income. In this situation rental income will again be subject to Corporation Tax, but these rates will probably be less than Income Tax. The landlord will also be able to use the annual capital gains allowance to offset against any gain when the property is sold. The main disadvantage is that the landlord will face an increased administrative burden of running a company, as well as organising leases.

4. Property owned by a pension fund and rental income taken as income to the pension fund. The principle benefit with this situation is that rental income will not be subject to tax within the pension fund. In addition there will be no tax on the gain when the property is sold. The disadvantage is that the regulations do not permit holding residential property within a pension fund, although this is currently under review. The expectation is that borrowing powers of pension funds will be significantly restricted in 2006 and this will be another factor to consider.

If the wrong option is chosen, the landlord will pay more tax than is necessary, therefore it is advisable to think carefully about the options available. When choosing which of the above four main options is preferable, individuals should bear in mind:

• the length of time the landlord intends to hold the properties
• the amount of borrowing required
• the level and type of other income the landlord may have
• whether or not the landlord already has a company

Individuals contemplating getting onto the buy-to-let property market would be well advised to speak to a qualified accountant about the taxation implications of renting out. Acumen can be contacted on 01224 573904 and the website can be accessed at www.acumen.info.
Companies in the Acumen Group include Acumen Accountants and Advisors Limited, Acumen Financial Planning Limited and Acumen IT Consultancy Limited. Acumen Financial Planning Limited are authorised and regulated by the Financial Services Authority. Acumen Accountants and Advisors Limited are registered to carry out audit work and are regulated for a range of investment business activities by the Association of Chartered Certified Accountants but are not authorised and regulated by the Financial Services Authority. Acumen Financial Planning Limited, Registered in Scotland number 215343, VAT Number 894 6221 94. Acumen Accountants and Advisors Limited, Registered in Scotland number 153885, VAT Number 894 6221 94. Acumen IT Consultancy Limited, Registered in Scotland number 284749, VAT Number 859 474862. Acumen Holdings (Aberdeen) Limited, Registered in Scotland number 215503, VAT Number 894 6221 94. Registered office, Commercial House, 2 Rubislaw Terrace, Aberdeen, AB10 1XE.