Property Matters

Practical tax tips to guide you through the tax system and help you plan to minimise your liability.

Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice.

The rules, rates and allowances in this guide relate to the 2024/25 tax year and these may be different for other tax years.

Property matters

Direct investment in residential property has always been a popular form of investment.

Buy to let

The UK property market, whilst cyclical, has proved over the long term to be a successful investment. This has resulted in a massive expansion in the buy to let sector.

Traditionally, buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings. However the gross return from buy to let properties can change. Investors also need to take a view on the likelihood of capital appreciation exceeding inflation. Investors should take a long-term view and choose properties with care.

Practical Tip
When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the short and long term. An investment strategy based purely on saving tax is not appropriate.

Devolution of Property Taxes

Stamp Duty Land Tax (SDLT) applies in England and Northern Ireland, Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales.

Higher rates of SDLT, LBTT and LTT apply on purchases of additional residential properties. The rates are 3% above the SDLT rates, 6% above the LBTT rates and 4% above the LTT rates.

There are some exemptions from the rules. One of these covers the replacement of a main residence within certain time limits. Please contact us for further advice on this area.

Tax on rental income

Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest on non-residential properties only, agent letting fees and the cost of replacing furnishings. A property allowance is available such that property income of £1,000 or less does not need to be reported to HMRC.

Restriction of relief for finance costs on residential lettings

The amount of income tax relief landlords can get on residential property finance costs is restricted to the basic rate of income tax. Relief is given by way of a tax reducer rather than the costs being deductible in full from the rental income.

Property investment company

Sometimes it may be preferable to operate the property investment business through a company. Clearly there will be non-tax issues to consider (as for ‘running a business’) but some of the key tax differences are:

  • generally lower rates of corporation tax than income tax on rental profits
  • interest on loans to purchase the property will be deductible from profits in a company (rather than as a tax reducer for interest on residential property for individuals)
  • capital gains for companies are subject to corporation tax rather than CGT
  • no annual exempt amount for companies
  • extraction of funds from the company will often result in additional tax charges
  • additional taxes may be payable where residential properties worth more than £500,000 are held through a company.

Renting a room

There has been an increasing number of individuals seeking to generate income from their own home either by taking on a lodger or through ad-hoc lettings such as Airbnb or Vrbo.

Rent a Room relief

Income from letting a room within your main residence is property income. However, if gross rents for a tax year do not exceed £7,500, no income tax is payable. This relief is known as Rent a Room relief.

If rents exceed £7,500, the taxpayer has a choice whether to deduct actual expenses or £7,500.

The £7,500 limit is a maximum which can apply to either a property or a person, so if two individuals jointly own a property and take in a lodger, they must share the limit at £3,750 each.

Capital gains

Having a single lodger sharing the use of facilities such as the kitchen should not impact a taxpayer’s ability to claim private residence relief (below).

Main residence - other considerations

An individual’s or married couple’s only or main residence is generally exempt from CGT under a relief known as private residence relief. The exemption extends to grounds of up to half a hectare provided this is not used for any other purpose.

Tax Planning
Larger grounds may also be exempt, as can the sale of part of the garden or grounds for development. However, professional advice is recommended to plan for the best outcome.

There must also be clear evidence of occupation as a main residence and not just ownership. Certain periods of absence from the property can be deemed to be periods of occupation and as such, can count towards the exemption from CGT.

The exemption from CGT only applies where the whole property is occupied. Apportionment may be required where part of the property is used for business purposes or is let out with resulting gains being potentially taxable. Letting relief may apply where you have multiple lodgers or let out part of your home. We would be happy to discuss your specific circumstances with you.

More than one residence

Where an individual (or married couple) has two or more residences, only one residence at any one time can be treated as the main home for exemption. This is done by an election. Provided a particular residence has been the main residence at some time, then generally the last nine months of ownership is exempt. This applies even if another residence has become the main residence during this time.

Example
Joe’s house in Luton is his private residence, which he has owned for eight years. Fed up with commuting, he buys a flat in central London and elects for this to be his main residence. Exactly five years later he sells his home in Luton.
The Luton home is exempt for the first eight years whilst he was living in it and for the last nine months because, even though he had another home which was his main residence during this time, the last nine months is always exempt provided the home in question qualified as the main residence at some point.
8.75/13 of the gain on the Luton home will be exempt from CGT. Upon the eventual sale of the flat the whole of that gain will also be exempt.

The main residence exemption can be complex. Please contact us for further advice before making transactions in property.

Inheritance tax

The general growth in house prices has caused real IHT worries because retaining the family home in the estate when it is often the largest asset could result in an IHT liability of up to 40%. At the same time, finding a way to deal with it efficiently for IHT is difficult because individuals need a place to live. See our article ‘Minimising the Inheritance Tax Charge’ for further details.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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Juliet Morris Director of Redshield Chartered Accountants
Jenny Dinnage Redshield Chartered Accountants Director
Rachel - an employee of Redshield Chartered Accoutants
Emma is an employee of Redshield Chartered Accountants
Amanda is an employee of Redshield Chartered Accountants

Redshield Chartered Accountants Team

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We’ll make your accounting easier.

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