When choosing to purchase a second property, it is important to consider the tax implications, whether you choose to rent out the property or keep it as a second home. Whilst each circumstance is unique, we have prepared the below summary of common issues in respect of second home ownership.
Income generated by property rental should be declared on your annual Tax Returns.
It is important to ensure that sufficient records of all eligible expenses are kept so they can be set against your income, reducing the amount that is subject to a tax charge. Common expenses include:
- Mortgage interest
- Management charges
- Ground rent/service charges
In addition, if your property is let furnished, you are entitled to a 10% “wear and tear” deduction – this is intended to cover the costs of repairs and renewals of furniture and is often more favourable than claiming the costs of the renewals themselves. It is important to ensure that you have made your accountant aware that the property is furnished to be sure that you don’t miss out on this valuable deduction.
If there are expenses which you incur and you are not sure whether they are allowable, include the details with your Tax Return information and we will ensure that the appropriate claims are made.
Capital Gains Tax (CGT)
Tax is not usually at the forefront of people’s mind when they sell a property. HMRC now have links with the Land Registry and are being made aware of all property transactions. It is therefore key to ensure that the disposal of your property is being treated correctly for tax purposes.
Properties which have been an individual’s main residence are entitled to Principal Private Residence (PPR) Relief, which exempts a proportion of the gain arising on the disposal of the property.
To be fully exempted from CGT, your property usually needs to have been your main residence for the whole period of ownership, and must not exceed ½ a hectare in size, although there are some additional circumstances where the relief is still available.
If you let out a property which has been previously been your main residence you will be entitled to Lettings Relief in respect of any gain made on disposal. This relief does, however, have more restrictions and is subject to a maximum of £40,000 which may result in a proportion of the gain remaining subject to CGT.
You can only have one main residence and a married couple are deemed to have the same main residence. It is possible to move the election from one property to another to ensure that all appropriate reliefs are available on disposal. If you feel it would be beneficial to review the CGT position and highlight any tax saving opportunities, we would be happy to provide this service.
Inheritance Tax (IHT)
The government recently announced that tax-free Nil Rate Band for IHT will be frozen at £325,000 per person until 2017 when this rate will be reviewed. With average house properties continuing to rise, more and more individuals will find themselves in a position where a proportion of their estate will become chargeable.
Reviewing your financial position will ensure that no unexpected tax liabilities arise should the worst happen and will enable efficient tax planning opportunities to be identified and put in place.
Many clients are surprised at their level of wealth once all sources have been considered. It is therefore a very worthwhile exercise, even if you believe that you will not be liable to IHT.
Tyrrell & Company are currently offering a review of your Inheritance Tax position, with the first hour being free of charge. If this would be of interest to you, please do not hesitate to contact us.