Having a rental property may not be as simple as turning over your old home to letting agents and enjoying stress-free income.
Whether the property is UK or overseas sited will have an impact on your reporting requirements and tax liabilities. Consider how rental properties are taxed abroad and whether relief is available for that tax in the UK. Remember, although your rental income may be subject to tax overseas, you are liable to UK tax on your worldwide income if you are UK tax resident and domiciled, or deemed domiciled.
Do not forget that if you are not a resident in the UK for tax purposes but own property in the UK, which is let, then this needs to be reported to HMRC.
You should consider how ownership will be structured, such as funding arrangements and interest restrictions, whether friends/family will use the property and the impact on your estate and the VAT position. A purchase of additional property will mean paying higher Land Transaction Tax (LTT), Stamp Duty Land Tax (SDLT) or addressing the position in Scotland.
Joint ownership normally means that each party is taxed on an equal basis. Would it be more tax efficient to change this to utilise a partner’s lower rate tax band for example? Are you planning on purchasing more properties and should you consider making the purchases via a company or partnership structure perhaps? Corporate ownership would involve considering ATED, double taxation and the corporate interest restriction rules for instance.
What type of property is best for you? Are you happy with a long term tenant or would you prefer a holiday home or commercial let?
Furnished Holiday Lets (FHL) have certain tax advantages. For example:
- Capital allowances can be claimed against the cost of certain capital items
- Borrowing costs may be relieved in full
- Profits count as earnings for pension purposes
- Income is not subject to national insurance
- There is the possibility that business asset disposal relief will be available on the sale, taking the potential tax rate down from 28% to 10%
There are, of course, qualifying criteria, which must be met for a property to be a FHL. For example:
- Available for letting for at least 210 days (30 weeks) per year
- Let commercially for at least 105 days per year (15 weeks), excluding lets of 31 days or more to the same person
- Must be let with a view to a making a profit
For commercial property, capital allowances can be claimed and borrowing costs may be relieved. With the increase in interest rates, this may be appealing.
Should you decide to sell, or gift a UK sited property, then it is likely you will need to report this disposal to HMRC within 60 days of completion of the transaction. Any UK tax on the net increase in value will also be due at this time. Reporting requirements are strict and at the very least you should consider whether you have made any other disposals in the tax year and your anticipated level of income, to ensure you have paid the correct amount of tax. It is possible to pay capital gains tax at 10%, 18%, 20% or 28% on the net gain depending on the circumstances.
Letting a property may have some unexpected considerations. Make sure you take advice to ensure all your reporting requirements are met and that you have maximised all tax saving opportunities. Should you have any queries and would like assistance please contact Diane Nettleton on 01633 653167 or firstname.lastname@example.org. Alternatively, please contact your usual advisor on 01633 810081 or email email@example.com.