Basic Tax Facts
We strongly recommend that you seek the advise of a tax specialist as regulations relating to taxation are complex and subject to change. The following facts are meant as an approximate guide.
Income Tax
The net profit you make from the rent you receive will be subject to income tax at your highest marginal rate (ie it is as though the profit has been added to your income – if you are a higher rate tax payer than you will be subject to income tax at that rate – currently 40%).
As a rough guide to working out your net profit take your gross profit ie the rent you receive. From this deduct all your expenses. The largest expense is likely to be the mortgage interest payment (note capital repayments are not tax deductable). Other allowable expenses include, mortgage arrangement costs, maintenance costs or service charges where applicable cleaning costs, advertising, insurance, repairs and redecoration.
Capital Gains Tax
The profit you make on your property when you sell it may be subject to capital gains tax. This only applies to investment properties, your main residence is currently exempt. Properties that have been used for both residential and letting profits will be apportioned according to the time spent in either use. We all have a capital gains tax allowance.
Two other considerations with regard to the calculation of capital gains tax are that the purchase price can be increased in line with retail price index, having the effect of stripping out any inflationary gain. Also, a tapering relief can be applied the longer a property is owned. In the third year of ownership a 5% discount is deducted from the taxable amount each year up to a maximum of 10 years.
As with income tax, capital gains tax is added to your income and charged at the highest marginal rate.
For full details please refer to your local tax specialist.
Tax-friendly new dawn of professionalism awaits landlords
Most Government-commissioned reports are boring affairs that get filed away and forgotten. But a new one on the private rental sector is unlikely to gather dust and is set to be a seismic one for all concerned, as Rosalind Renshaw reports.
The Rugg Report is couched in the friendliest of terms, emphasising ‘light touch’ regulation. But it nevertheless recommends enormous changes — including mandatory licensing of all private residential landlords and of all managing agents. Not surprisingly, the national media seized on it as ‘draconian’ and bureaucratic and forecast the end of the amateur landlord, if not the buy-to-let sector as a whole. But landlords themselves saw it rather differently. Richard Jones of the Residential Landlords Association said: “At last … an independent report that appears to understand how a largely misrepresented private rented sector really works and the potential it has to make a genuine contribution to the national economy and housing market.”
So, why are those at the sharp end of property investment so pleased? Mainly because the report finally recognises the importance of landlords in the housing market and suggests major tax changes which will help both landlords and tenants. The proposed tax changes, in a nutshell, encourage and reward improvements to, and regular maintenance of, properties and would treat private landlords for the first time as running businesses.
‘The Private Rented Sector: its contribution and potential’ is by York University academics Julie Rugg and David Rhodes. Of course it did not please everyone: it did not go down well with those who had been lobbying on behalf of larger, institutional landlords; with those who had been arguing the case for the encouragement of ‘build to let’; while some on the social housing side were worried that the licensing proposals had not been thought through properly, with no account taken of how tenants would be treated if their landlord had their licence removed.
Nick Jopling, head of residential at property firm CB Richard Ellis, said: “We agree with Rugg that the smaller landlord needs to grow and treat letting as a business, not just an investmeit.” But he was disappointed the report did not back the idea of build-to-let, as he felt it could help rescue the house building industry, currently on its knees.
The report -and this is one of the many aspects that has pleased the private landlord movement so much — does not accept that larger landlords are any better than smaller ones and insists that a good landlord is a good landlord: “Policies should concentrate on helping good landlords of all sizes to expand their portfolios. It is important that policies should include smaller landlords, since larger landlords generally grow through portfolio acquisition.”
The report also suggests that smaller landlords give their tenants better value for money because of their ‘sweat equity’ in attending to their own repairs and maintenance. It dismisses suggestions that standards within the private rental sector could be improved by more corporate landlords or greater use of managing agents. Indeed, it points out that the latter are unregulated and “there is widespread dissatisfaction with their standards”.
Throughout, the report acknowledges the contribution made by the private rental sector and essentially talks about how it can be grown and encouraged, recommending tax incentives for landlords to keep their properties in good order. However, the report does point the finger at rogue private landlords: “Very many landlords operate professionally but some simply don’t think letting needs regulation and a very small proportion act illegally.”
The report also suggests that the poorest tenants — those on housing benefit — should have access to a wider range of properties, thereby pushing the worst ones out of the market. Changes to help this happen could include helping tenants with rent in advance and deposits.
Landlords can also heave a sigh of relief that the report does not suggest making changes to their rights of possession, and in particular does not support the idea that landlords cannot serve a section 21 notice if they have had a complaint about repairs.
Social housing lobbyists criticise this aspect of the report, saying tenants deserve better tenure and that the report should have recognised ‘retaliatory’ evictions (where a tenant is evicted if they complain about disrepair). Instead, the report says there is little evidence that the practice is widespread. Nor does the report accept that ‘studentification’ as a major issue. There have been recent claims, including by the Government itself, that it is a problem in university towns and cities. The last housing minister, Caroline Flint, said there were too many areas overinhabited by students during the academic year, and which turned into ghost towns in the summer months. She proposed that the numbers of student properties should be capped — an alarming prospect for property investors who see student property as an inflation-proof business in an otherwise difficult housing market.
But the Rugg Report says there is a low incidence of studentification and it insists that associated problems — noise, for example — are really policing issues. It also calls for best practice guidance for rental homes for immigrants, noting that many live in slum conditions. However, there is no escaping its main recommendation, that all private landlords be regulated. So, how light touch would it really be?
The idea would work like a driving licence. The licence itself would cost £50, with points deducted for bad behaviour and the licence removed for serious breaches. The money paid would fund a redress scheme — a compulsory ombudsman service to which all landlords would have to belong and to which tenants could complain. The report’s findings are now likely to find their way into a Green Paper and pave the way for consultation and legislation.
Key recommendations at a glance:
• Licences to be mandatory and cost £50.
• Points could be docked from licences.
• Rogue landlords could lose licences and be banned from renting out property.
• Licensing number to be on every rental agreement.
Income from licences to fund a housing justice system.
• Social lettings agency to be set up in each local authority area, to manage private homes on behalf of landlords.
• Overhaul of Stamp Duty banding system to enable landlords to buy properties in bulk.
• Reform of Capital Gains Tax, so that landlords could quickly gain relief from property improvements.
• Mandatory licensing of managing agents and a possible role for them in helping local authorities inspect private rental properties.