This article appeared in the Yorkshire Post on Saturday 7th April 2007.

Taxing Times – Buy-to-Let

John Guy Senior Tax Consultant

I leave it to others to advise on whether or not acquiring property for letting residentially is a sound investment; instead I will assume that residential property is already owned or that the decision to purchase has already been made.

All income from the letting of property, both residential and commercial, is regarded as a single property-letting business. The taxable profits are generally calculated in the same way as any other trade or business, though the profit is regarded as investment income rather than earned income. The Revenue requires profits to be calculated to 5 April each year, unlike a trader who can choose his own accounting date.

The principles are usually the same for individuals, paying income tax, and companies, paying corporation tax. One notable exception is when a loss is incurred: an individual may only carry it forward against future profits of the property-letting business, but a company can also set it against any other income of the year or the previous year.

The treatment of capital expenditure can be confusing. Capital allowances cannot be claimed for equipment let to the tenant with a property, though they can be claimed for equipment in communal areas that are not strictly part of the letting, for example a lift in a block of flats. Those letting furnished properties may claim a "wear and tear" allowance equal to 10% of the net rents, which is deemed to cover the renewal and replacement of furniture and furnishings. A property is generally regarded as "furnished" if the tenant could live there in reasonable comfort without needing to provide anything himself.

Alternatively, the "renewals basis" may be adopted. No relief is given for the initial outlay on equipment, furniture and furnishings, but the cost of replacing them with items of a similar quality may be claimed. The renewals basis may be adopted in respect of both furnished property and other property that could not be regarded as furnished but where for example carpets and curtains are provided.

Whatever basis is adopted must usually be applied consistently; the Revenue will not permit you to chop and change from one year to another, though this does not necessarily rule out a change “once and for all”. Note that the wear and tear allowance and the renewals basis apply to replacements of equipment, furniture and furnishings; repairs to those items or to the property itself may be claimed in addition.

As the income from letting residential property is an exempt supply, VAT is not usually an issue for landlords, though someone who is otherwise registered will have to show his exempt supplies on his VAT return and might even be able to recover some of his input tax under the partial-exemption rules.

When an individual sells an investment property it will normally be subject to capital gains tax, but will attract taper relief at the non-business rate and the annual exemption. A husband and wife should consider whether to own the property singularly or jointly depending on their respective income tax rates and whether or not their respective annual exemptions are available on a sale.

It is debatable whether or not investment properties should be held in a company. A company can benefit from a 19% rate of corporation tax on income, compared with potentially 40% for an individual, but it can have disadvantages as regards profits on a sale of a property. These are the unavailability of either taper relief or the annual exemption and the fact that the profit belongs to the company, leaving the shareholder with a possible further tax charge on extracting the profit from the company.

Special tax benefits apply to furnished holiday properties let on a commercial basis. The general requirements are that the property is available for let as holiday accommodation for 140 days in a 12-month period, is actually let for 70 days in that period and is not occupied by the same person for more than 31 days in the holiday season. For capital gains tax purposes the property can qualify for business taper relief on a sale, roll over relief if the proceeds are reinvested in another qualifying asset or hold over relief on a gift. An individual may set an operating loss against his other income. Providing that there is sufficient involvement in letting on the part of the owner, a property can also qualify for business property relief for inheritance tax purposes.

Garbutt & Elliott are Chartered Accountants and Tax Advisers with offices in Leeds (0113 2739600) and York (01904 464100). John Guy can be contacted at the York office, or by email to jguy@garbutt-elliott.co.uk