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The ideal buy to let property gives the investor a steady income and the opportunity to benefit from the increase in value of a solid asset. The taxman has an interest in both parts of that equation.
The Inland Revenue treats income from most letting properties as investment income. This means that such properties are not treated as ‘business assets’ and are disqualified from the taper relief for Capital Gains Tax purposes. An exception applies to furnished holiday lettings where separate rules apply. There are also separate rules if you let out rooms in your own house.
So what allowances can be claimed for a standard let of a furnished property? The major revenue expenses of loan interest, insurance and agent’s fees are allowable against tax. Repairs are also allowable as long as they do not relate to the improvement of the capital element of the investment. The initial refurbishment of a property prior to the first let would not be allowable.
The wear and tear of furniture and fittings can be relieved in one of two ways. You can opt to claim the replacement cost of an asset after it has worn out. Let’s consider the cost of a suite and some carpets. The initial cost does not attract any allowances. But after a few years when the items are replaced, you can claim that against tax.
The alternative is to elect to claim a wear and tear allowance of 10% of the rental. If the rent includes charges that would normally be borne by the tenant, such as council tax, then the allowable rent is reduced by that amount.
On disposal of the property, the general rule is that capital gains are subject to Capital Gains Tax. It is difficult to reduce that charge, other than to move into the property yourself and establish it as your principal private residence. If that is a practical proposition, look into it carefully and make sure that the move cannot be challenged.
David Land is a chartered accountant specialising in helping small businesses in Edinburgh. He can be contacted on 0131 315 2528 or dland@blueyonderANTISPAM.co.uk (remove the ANTISPAM to make the e-mail address work)
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