Investment Property and Tax
The tax liabilities on investment properties vary and depend on the value of the property purchased and whether it is sold on or let out. Stamp Duty Land Tax (SDLT) is the first consideration, although residential property costing £125,000 or less is exempt.
For properties between £150,000 and £250,000, SDLT of one per cent of the purchase price is due. This figures rises to three per cent for property that costs £250,000 - £500,000, and four per cent for properties over £500,000.
This tax is charged on purchases of flats, houses and other buildings and land, although there are exceptions. Disadvantaged Areas Relief is available in certain parts of the country if the purchase price is £150,000 or less, and zero carbon houses under £500,000 are exempt, while more expensive zero carbon homes have £15,000 knocked off their SDLT bill.
Relief for Green Homes
A house must be zero carbon over the course of the year to qualify for the SDLT relief. It can be connected to mains gas and electricity but needs to have sufficient additional renewable power to cover the average consumption of the house over a year. To achieve this, the house will need to incorporate renewable energy technologies and the fabric of the building will have to be insulated and built to very high standards.
The buyer of the property is responsible for completing the land transaction return and paying the SDLT, but, in practice, a solicitor or licensed conveyancer will handle this for their client.
Capital Gains Tax (CGT) is another consideration if a person is selling a property that is not their main home. If the property is worth more than was paid for it when sold, CGT may be due, although the first £9,600 of the total taxable gains are tax free in tax year 2008-2009.
Bear in mind that when calculating the chargeable gain, some of the costs of buying, selling and improving the property can be deducted. If a loss is made on the property, it can be possible to set that off against other chargeable gains the owner may have. Also, if a couple are living together, a property can be transferred to a husband, wife or civil partner without having to pay CGT, but if the property is given or sold cheaply to children or others, CGT may be due.
Letting residential property is treated as a single business, even if the owner lets out more than one. If several properties are let out, it is possible to offset losses from one against profits from another. Tax is paid on any profit as part of the owner's overall income.
How it Adds Up
To calculate the net profit, add up the rental income and the allowable expenses and take the allowable expenses away from the income. For those with more than one residential letting, group all the income and all the expenses together.
Then, to arrive at the taxable profit, deduct any allowances entitled from the net profit. If the property is let furnished, deduct either a wear and tear allowance based on a percentage of the rent, or a renewals allowance, which is the cost of replacing old items with new ones minus any money gained from selling the old items. It is also possible to deduct certain capital allowances for the cost of equipment relating more generally to the lettings business.