The Best Buy? | Living North

The Best Buy?


House and Money
The experts at Ribchesters offer their advice on investing in Buy-To-Let properties

In recent years, the stock market in the UK has been particularly volatile. Add to this a reduction in public confidence in pension funds as a means of saving for the future and low interest rates on savings, and it is not surprising that investors have looked elsewhere for effective returns. 

The UK residential property market, whilst unpredictable, has proved to be a successful investment over the long term to produce both income and capital growth. Against that background, ‘Buy-To-Let’ investment has become increasingly popular as the demand for rented property has increased. This demand looks likely to continue, with a shortage of affordable housing and the combination of increased student debts, a stubborn labour market, the increase in marriage breakdowns and high deposit requirements making residential mortgages difficult to obtain. 

Capital growth on residential property may be difficult to predict in the short term but income returns usually far exceed those that can be achieved from even the best savings accounts. However, there are many tax considerations when investing in property. These range from structuring the best method of financing the initial purchase, to structuring any joint-ownership arrangements, ensuring tax relief for all expenditure and capital gains tax implications when properties are realised. The timing of a disposal from one tax year to another can be crucial in ensuring exemptions are available and tax rates are minimised. 

Imminent changes to Child Benefit rules could make it advantageous to rearrange investment portfolios to direct profits from higher-earning spouses to lower-earning ones to avoid loss of Child Benefit. Or selective refurbishment plans could be used to eliminate or reduce profits where appropriate to help retain Child Benefits. Certain types of investment, such as furnished properties and holiday lettings, have their own additional tax rules involving wear and tear allowances, the use of losses and more favourable capital gains tax rates. There are also capital gains tax reliefs where a let property has previously been the principal residence of the investor. This is often relevant to those in second marriages who have retained previous homes as investments. Overall, the tax position relating to property investment can be a costly minefield, and it is critical that appropriate professional advice is sought at each stage. 

Rental profits from and gains on buy to let properties are subject to income tax and capital gains tax irrespective of whether the tenant is a family member or an unrelated party. Many misunderstand that position. Failure of landlords to report property income or gains to HM Revenue & Customs is a tax offence and could result in significant financial penalties and interest on unpaid tax. In June 2012 HMRC expanded its compliance and enforcement programme by announcing a new Property Taskforce to investigate property tax evasion in specific geographical areas, including here in the North East. 

Given that one of the aims of property investment is long term capital growth, sheltering any capital gains can be an important consideration. A limited company ownership structure can assist in sheltering longer term growth and thus indirectly form part of inheritance tax planning, without handing immediate control and ownership to the next generation. It can also limit the rate of tax on income where the ultimate investor is personally liable to the higher or top rate tax bands. 

An arrangement that suits one set of circumstances may not suit another, and so a ‘one size fits all’ approach cannot be taken. Overall, the tax rules and considerations surrounding investment properties are ever changing and increasingly complex. It is therefore very important to seek professional advice both before and during ownership in order that your tax affairs are structured in the most appropriate way. 

Ribchesters, 67 Saddler Street, Durham, DH1 3NP 0191 384 8581 
Sutherland House, 5-7 The Friars, Newcastle upon Tyne 0191 261 8694

Published in: November 2013

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