Save tax on buy-to-let investments

If you're a buy-to-let investor, you need to get the best tax planning and financial advice you can to ensure you don't give the taxman more than you should. The problem with buy-to-let is that no matter which way you turn, the taxman is peering in at every window.

To enter the market you have to pay stamp duty, then there's income tax on the rental income. When you sell after three years there's capital gains tax (CGT) and finally, when you take up residence at that special care home in the sky, there's inheritance tax to be paid on your estate.

The good news with rental income is that you can offset a number of your costs against income tax liabilities including interest on your mortgage, management costs, repairs and you can claim 10% of the income to cover wear and tear.

Whether you pay capital gains tax when you sell depends on whether you have lived in the property. When you sell the home you actually live in theres no CGT to pay but there is on profits made on a sale from another property.

How much CGT you pay depends on how long you have held the property. Under the taper relief scheme, if you have held the property for five years or more your CGT liability gets reduced by 15% and after ten years by 40%, meaning you pay CGT on 60% of the profit made.

But if your investment is classed as a business asset, things could be quite different. CGT on business assets gets slashed by 50% after the first year, and by 75% after the second year.

Mike Warburton of accountancy firm Grant Thornton said it depends who your tenants are if you let to a business, such as a private or limited company, you could claim business CGT rates. Furnished holiday let homes in the UK are classed as a business asset for tax purposes.

Buying overseas can make things even more complicated and, if domiciled in the UK, you could end up paying tax in both countries, although you may be able to claim foreign tax back under the double taxation relief scheme HM Customs & Revenue has with 100 countries. Some people have set up offshore companies or trusts but personal tax adviser Simon Rees at PricewaterhouseCoopers warned that you need specialist advice to do this and it could lead to nasty tax problems.

To make a fast buck, other investors have been dabbling in off-plan buying from builders. This is buying before the property is actually standing, in the hope it will rise in price by the time it is completed. Some aim to sell straight away and Mr Rees explained that in this case in the UK you would be classed as a trader and you would pay income tax at your normal rate.

From April next year you may be able to avoid CGT by investing in buy-to-let residential property as part of a Self Invested Personal Pension. However, the rules on how this will work are still being clarified.

15 July 2005 © Moneyextra.com

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