Tax Aspects of Property Investment

By Chris Moir, personal tax manager at RMT Accountants & Business Advisors

Property investments are a popular way of creating new income streams, but wherever income arises, there are related tax implications, and it’s vital to fully understand your opportunities and liabilities before making this kind of investment.

Income arising from land and buildings is generally treated as investment income, unless it is from furnished holiday lettings, property development or the provision of services like hotels and guest houses, when it is classified as trading income.

From an accounting and tax point of view, all rental income (except furnished holiday lettings) is treated together as being from a single ‘property letting business’, regardless of the letting terms, with profits and losses calculated using the same general accounting rules as for trading.

There are several allowable expenses to consider when calculating taxable profits, including interest on loans used towards the property purchase, business rates or council tax, rent payable to a higher landlord, insurance and management, maintenance, repairs, redecorations and travel costs specifically for property letting purposes.

Improvement expenses, such as extensions or installing central heating, and those required to make newly acquired property usable all form part of the property’s capital cost. Allowances are also available to cover both wear and tear on, and renewal of the fixtures and fittings included within furnished lettings.

For commercial properties, capital allowances may be claimed in respect of plant and machinery supplied by the landlord. Allowances are calculated in the same way as for trades, and deducted as an expense.

Owner occupiers and tenants letting furnished rooms in their only/main residence may claim rent-a-room relief.

Property letting businesses complying with the relevant conditions can qualify for some very important tax concessions. Furnished holiday lettings are treated for tax purposes as if they were trades, so unlike other domestic lettings, the expenses can include capital allowances on furniture and kitchen equipment. The income also counts as ‘relevant earnings’ for pension contribution purposes.

For mixed use of property, both business rates and council tax may be payable, unless the business use ‘does not materially detract from the private use’.

Until 1 April 2016, there is no charge to Stamp Duty Land Tax (SDLT) on residential property purchased for £125,000 or less, or on non-residential property for £150,000 or less.

From that date, higher SDLT rates will be charged at three percentage points above the current SDLT rates on purchases of additional residential properties above £40,000, such as buy-to-lets and second homes.

Initial allowances of up to 100% are available for expenditure on renovating empty/underused space above qualifying shops and other commercial premises to provide residential flats for leases of up to five years. A maximum 100% initial allowance is also available for qualifying business premises renovation.

Purchases and sales of properties amounting to a trade will be taxed as income in the normal way, but in all other cases, disposals are subject to the normal rules on capital gains.

Furnished holiday lettings count as business assets and qualify for Entrepreneurs’ Relief. They may also qualify for rollover or gifts relief, and in some circumstances, inheritance tax business property relief.

Whilst some of the principles of property taxation may seem relatively straightforward, there are many traps into which the unwary could fall, and seeking professional advice before undertaking any related actions is definitely advisable.