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UK Residential Property - buy to let

Owning more than one property is becoming more popular in the UK. People look to invest in the UK residential property market because they generally have a greater understanding of the market place and are more familiar with the terminology than that of the obvious alternative investment choice of stocks and shares.

Some people will buy a property to let at the outset whilst others may develop property with the intention of selling but change their mind as a result of market conditions. The property developer, trader and/or investor will have distinct accounting and tax issues to consider. Trading is classified differently to investment for tax purposes.

In order to fully assess the financial return on a potential property investment the total costs including any tax payable will need to be assessed and factored into the decision making process.

The tax position is not always straightforward as the expenses that are allowable for tax purposes throughout ownership and on any future sale have to be reviewed and analysed between capital and revenue to assess the correct tax treatment.

Revenue costs include expenses such as maintenance and agency fees. These expenses can be offset against the rental income to arrive at the net profit figure on which tax is calculated.  The interest element on any finance on acquisition is also allowable for tax revenue expense.

Expenditure on the improvement or enhancement of the property will be classed as capital and therefore will not be an allowable expense to offset against the rental income.  In some cases it will be allowable against any gain arising on the sale of the property.

Additionally if you own more than one investment property i.e. you have a portfolio then specific tax rules exists to deal with the offset of any losses on one property against the profits of another.  The tax treatment can also vary depending on whether the property is let unfurnished or furnished and/or as a holiday letting.

It is also important to consider who will own the property as this will impact on any tax payable. Ownership could be individually, jointly, in a partnership or within a corporate vehicle.  For example if property is held in a corporate vehicle any gain arising on a sale will be taxed at corporate tax rates and tax will also apply on any extraction of profits  from the company.  Also if the property is owned by an overseas buyer then specific rules and compliance requirements exist for non resident landlords.

Property investment may be a key part of your financial plan for the future and as with any major financial decision you need to consider the post tax return on your investment. Inevitably the accounting and tax treatment is crucial to arriving at the true financial outcome of any such investment

Here we aim only to highlight some points for consideration.  The location and cost of finance is important but being aware of the accounting and tax issues as mentioned above should also help when deciding on a property investment.

 

 

Date: 14th January, 2015
Author: Helen Cain

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