buy to let: tax implications?

[Stephen]

Hello,

I tried to post this last night but it is not showing here; apologies if you see double. I know I know there are some landlords in uk.diy and I will be doing the renovations myself, so I hope it is not too off topic.

I was interested in buying a house, renovating it, and then selling it, hopefully for a profit. I haven't done this before. I saw an accountant who said that if I did this, the sale will be considered income and I will have to pay income tax on the profits. The accountant advised buying the house and then letting it. He said that this way, when the house is sold, I would have to pay capital gains tax rather than income tax and this is more tax "efficient" (i.e. less to pay).

He also said that it would be best to get my other half involved because any profits would then be offset against two personal tax allowances, rather than one. We are not married (I think that makes a difference tax-wise). Is there a uk.tax group where I should be posting this?

The only thing holding me back from purchasing a suitable house is not knowing whether to put both names on the mortgage or whether just to buy and borrow in my name. The last time I spoke to the accountant, he said that legal ownership was largely irrelevant and that "beneficial ownership" was what counts.

I have emailed some more questions to him but thought I would ask here, whilst I await his reply. Is this right? Can I put the house and mortgage solely in my name but then split the rental income with my other half? What is "beneficial ownership"? I am surprised that the name on the house and mortgage is not relevant.

What do you think about the let vs. sale route? Which would you do/have you done?

Thanks, Stephen.

[Andy Burns]

I notice you've also posted this to uk.legal.moderated, if the first time you cross-posted it to both, rather than muli-posting, that will explain why it appeared in neither group, the moderators get first dibs on the message and they refuse cross-posts.

[Lobster]

BTDTGTTS

Had the same advice myself. What I think the above boils down to is whether your new 'business' is primarily one of 'property development' or 'letting'. We sold our property after 3 years, paying CGT, and it didn't catch any attention from HMRC. I suppose you just need to do the sums (paying income tax versus paying CGT and renting) and work out for yourself which will be best for you.

That's got to be right, whether you're married or not - that's assuming you have a stable relationship of course, especially if you're the one putting up the cash.

SWMBO and I have rental property in joint names - mortgages, land registry records, tenancy agreements, the lot; and split the rental income. If you own the property as 'tenants in common' rather than 'joint tenants'(ggogle what the difference is) you can vary the proportions of ownership at will, which is reflected in the distribution of rental income between you. So if one of you is pays top rate of tax and the other pays basic rate, you can set the ownerships as say 1%:99%.

Not sure about beneficial ownership; however if you don't own the property jointly when you come to sell it, then you can't take advantage of your partner's CGT allowance, which is a no-brainer. You can transfer assets around immediately before the sale, but it may attract HMRC attention as not being 'real' and just being a tax dodge, and dissallowed.

is a pretty good forum

David

[jgharston]

Bollox. It's income regardless of where the income comes from, but the income from the sale of property is a capital sale, and garners capital gains tax. If you want to be a landlord, make a concious decision to be a landlord, don't do it by default or as a stop-gap between buying and selling.

Capital Gains Tax is paid on the profit from a capital sale, that is the sale price minus the purchase price minus all capital investment (refurbishment and improvement, not running repairs) minus a CTG allowance for each owner.

For example, if you buy a property for =A360K, spend 60K refurb'ing it, and sell it for =A3180K that is: 180K - =A360K - 60K - 10K allowance equals 50K taxable. The tax rate you pay is determined by adding that 50K to your other income for the tax year. The income tax band that puts you in determines the GCT band you pay. If the

50K plus your other income puts you in the lower income tax band you pay 18% CTG on the 50K. If the 50K plus your other income puts you in the top income tax band you pay 28% on the 50K.

The other party has to legally be a co-owner on the deeds and mortgage, you can't just "assign" a share to them.

Only if you're chosing to die before you sell it.

If it's only in your name, you are the sole owner, and all tax liabilities are solely yours. If you want more than one person to be liable to tax then the other person(s) must be named on the mortgage and title deeds and be also liable to pay the mortgage and have rights to the property.

Decide what you want to do. Do you *want* to be a landlord or do you want to property refurbishment?

JGH

[Robin]

If the trade is buying and selling properties then there is no "capital sale". It's just a sale - like a trade of buying and selling widgets. but I have to say that is a rather misleading combination of "profit" . The accountant was right (as Lobster has already posted). And FTAOD buying and selling just one property with a view to a profit can be a trade

[Dave Liquorice]

Even if the property is bought with the intention of refurbishing and selling, ie "property development" no letting or use as main or second home, rather than bought with the intention of letting or using as main or second home?

There are tax differences between main and second homes.

Who knows when anyone is going to die. Might lose an argument with a bus this afternoon...

Not being married is a legal mine field. Not being married and and not having Wills is very very messy indeed. The surviving partner has very few (if any) rights to the deceased estate.

[David WE Roberts]

When I last looked into this I found it quite complex, but all related to capital gains tax. Selling a house is a capital gain to a private individual. [I don't know what rules apply if you are running a business to renovate and sell on properties - in that case it might be considered income to the business instead of a capital gain; seems reasonable.] If you own a house and don't live in it then when you sell you are liable for CGT on any period when you didn't live in it as your primary residence. AIUI this is to tax people with second (third etc.) homes who effectively invest in the property market and take habitable houses 'off the market'.

When I last looked you were not liable for CGT on a home where (1) You lived in it as your primary residence (2) You rented it out (I assume this was to encourage people to rent out empty houses instead of just sitting on them as unused housing stock and waiting for them to appreciate). In either case the last three years of ownership did not count. I suspect (again) that this was to enable people to buy a house before they had sold the previous one and give them a reasonable time to sell without CGT liability. We did this twice (with bridging loans) when moving locations at the company's expense. So reasonable to allow a 'bridging' window for people to relocate without penalising them with CGT.

So unless the rules have changed you should not be liable for CGT on a rental property for the period which is occupied by a tenant and in any case for the last three years. You are liable for tax on any rental income after deductons.

On this basis it would look a no brainer to buy, do up, then sell withing three years thus avoiding CGT. Which is why I suspect that going down that route would be regarded as running a business for renovating houses and any gain would be treated as income to the business.

So your accountant masy be partly right - I hope he is wrong about the CGT on a rental property because we are renting out a property which used to be our primary residence which we couldn't reasonably sell and don't expect to accrue CGT against it if we finally decide we can sell it.

We will be liable for some CGT on our now primary residence should we sell it before the rules change again because we bought it before we moved into it so it was unoccupied for a time.

You should anyway look for a second opinion. Try the Motley Fool forum

which covers property renovating and buy to let.

Usual disclaimers - IANAL etc.

HTH

Dave R

[Stephen]

Thank you. That's very interesting.

I did cross post to both groups. I thought the solicitors in the legal group and the landlords in the diy group could give me the theory and the practice.

I did wonder whether cross posting may have been the issue, which is why I reposted as separate messages. I am surprised that the OP did not get posted to uk.diy. If moderators blocked it to ulm that's their right but I am surprised that they could prevent it being posted to uk.diy. It doesn't seem right that the moderators of one group can block posts to a completely different group.

I must learn more about moderated groups (where can I?). Thinking about this: where to messages go to be read by moderators: is there another group that only they have access to? How do you become a moderator? Do you only need one moderator to approve a post or do you need a majority vote?

If the cross post had been allowed, news clients would have filtered my post so that you only saw it once. Because I have had to submit two separate posts, it now appears twice, so it seems to me that blocking cross posts might be causing the very problems that they are trying to solve. I've learnt a lot from various threads in uk.diy that have come here after being cross posted to or from another group.

Just my random thoughts!

Thanks, Stephen.

[polygonum]

Not all news reading processes ensure that you see only one response.

Sensible cross-posting can be very useful. But excessive, poorly targeted, spammy cross-posting has severely affected its acceptability.

And, when moderating comes to town, then cross-posting can be problematic - with both timing (due to moderating delays) and absence (due to posts being moderated out and individuals responding on one group only) making threads appear haphazard and incoherent. Even more so than many already do! :-)

[Stephen]

I enjoy doing DIY around the house and thought I would like to try property developing; doing as much as I can but getting people in where I can't (physically or legally) do the job.

From my very limited knowledge, I think you get to keep a higher percentage if you pay CGT. Each partner has an annual £11,000 allowance, so you would not pay CGT on the first £22,000 of the profits. The personal allowances with income tax are much smaller and these would be eaten up by our wages (as we are new to this, we would keep our day jobs as back-up).

The CGT route is only useful if your plan is more long-term. If I wanted short term returns, for example buying property two with the profit from property one, I would have to go down the income tax route. I think you become a 40% payer at £42,000, which is a lot of money except when you talk about property. WRT to property £42,000 is not very much. On the other hand, I suppose it is only profit that is taxed not the sale price. I'm only looking at a mid terrace, so the profit will be more modest.

That's what I thought originally but now I am not so sure. I have googled "beneficial owner" and some of the results are from HMRC. They contradict themselves. It says that the beneficial owner will have to pay tax regardless of whether they are the legal owner but on another page they say one way they identify the beneficial owner is by looking who the legal owner is!

I think this concept of beneficial ownership only has two uses: for tax and in divorce, allowing someone who is not legal owner a share of profits from a house solely in a partner's name.

Stephen.

[Jonathan]

Looking at sites like this:

don't think it is added to your income but taxed as a separate amount.

Jonathan

[Phil]

[Robin]

which has

"Property trading If you buy and sell property as your business you pay Income Tax rather than Capital Gains Tax on any profits you make from the property. This applies whether you are a sole trader or in a partnership. This may include a one-off purchase and sale of a property. You usually pay any Income Tax due by completing a Self Assessment tax return. "

[stuart noble]

Having joint bank accounts helps

[John Rumm]

I presume you could use the MP's trick and move into your new property. No CGT to pay on sale of your "main" residence.

[Stephen]

That's another dilemma I'm in at the moment. It all depends how this ones goes. If I enjoyed doing up a house more than my day job (which is quite likely!) I would love to give up my job and do property development.

However, if when I have finished working on the house, I cannot sell it for a reasonable profit, perhaps it makes sense to let it and wait for the house prices to pick up?

But I do take the point of another reply, which said that doing up to sell and doing up to let involve different work being done. If only I had a crystal ball!

Thanks, Stephen.

PS I'm looking at the links other posters gave - thanks.

[Stephen]

At what point does something become your business? The accountant asked whether I would keep my employee job. I think he was suggesting that if you worked full time in another job, property development could not be considered your primary occupation. However, I would expect HMRC to counter this by saying it is possible to have two jobs.

[mogga]

Every house will sell. It's just at what price. When prices go up it'll cost you more to buy.

You have to do the research. Look at areas very local to you. No point spending hours commuting to a property - especially if at first you can only spend after work and weekends on it.

Chat to some agents. Some are more helpful than others. Ask to be kept informed of any repos coming up. Go view a few houses to get an idea of what people are selling for the money.

If you're looking to sell - then can you decorate to a high standard? Can you dress a house (additional cost) to give that lifestyle impression that'll make people fall for it?

Look out for houses for sale that turn into repos. Some of the banks are very keen to just get shut at the moment - maybe though they know they have more to come yet.

[tim.....]

If you don't make a profit on a resale then you paid too much.

Learn your lesson and move on - you make your profit on a refurb when you buy. You need to learn to buy properly to make this work, waiting for an increasing market is a mug's game.

tim

[tim.....]

whether a "hobby" is a business will solely depend upon the facts associated with that "business".

Whether you have any other employment is completely irrelevant

tim