More people than ever are finding themselves in the position of owning a second property, so we’ve outlined a few fundamentals you should be thinking about…
1. Keep a diary
This is particularly useful when you come to sell it at a later date and most of these details will help your accountant calculate any tax liabilities and tax relief available. In particular, it is useful to keep details of:
- when you first bought it or took ownership and the circumstances surrounding it
- how a purchase is funded (cash or mortgage)
- legal fees you incurred on acquiring the property
- amounts spent on improvements or repair
- any periods of time that you lived in the property
- any periods of time that you rented the property and details of rent received
- copies of any Deeds of Trust that were in place and the periods they covered
- specifically for Furnished Holiday lets, keep a full and detailed diary of when the property is let out, when it is generally available, and when it is not!
2. Review your mortgage arrangements
If the property has a mortgage on it, make sure you think about whether a repayment or interest only mortgage is the right one for your circumstances. When calculating your net rental income, only the interest element is deductible, so an interest only mortgage will help lower your annual income tax bill, but because you are only repaying interest on your mortgage, you will have to have a plan in place as to how you will repay it later on.
You should also speak to an IFA (Independent Financial Adviser) to review your options when it comes to obtaining a mortgage for an investment property before you make any offers on properties, to make sure you know you can get a suitable mortgage.
3. Ensure You Have Adequate Insurance
Make sure you contact your insurance company to let them know the status of the property. In particular if you previously occupied a property which is subsequently rented out, then you need to make sure your insurance company knows this, as the cover requirements will be different, and special landlord policies are available when it is rented out.
4. Understand the Difference between Capital Gains Tax and Income Tax
With properties, you can become liable for Income Tax on any net rental income received and Capital Gains Tax on the gain you make when you sell or dispose of it at a later stage. There are various allowances and reliefs available to help reduce both tax liabilities but it is important that you know the difference between capital or income related costs when calculating your liabilities.
Generally speaking, a cost that increases the value of a property or related to the transfer of a property would be taken into account for the Capital Gains Tax and most other costs relating to the property would help reduce your annual Income Tax liability.
5. Notify HMRC
If you do decide to rent out a property that is not your main residence or find yourself with a Capital Gain from the disposal of a second property, make sure that you let HMRC know of this by 5th October following the tax year in which any gain occurred or income started.
If you sell a residential property that’s not your main residence, and have generated enough capital gains to pay tax, you must report and pay any tax due on UK residential property using a Capital Gains Tax on UK property account within 60 days. Not all legal professionals will remind you of this so at the point of sale, so you need to be aware of your obligations. When you know you are going to sell the property, it would make sense to get registered for the HMRC account straight away, and if you need any help with working out how much your tax will be, consult with an accountant.
6. Consider a Declaration of Trust
Not many people realise that a property can be legally owned by one person, but the income can be transferred under a declaration of trust to another. A Beneficial Declaration of Trust is a legal document that can transfer the benefit of future income and potentially capital gains that may arise from a property to another person. This may be useful when you are looking to provide a tax effective income for spouses or other family members.
7. Seek Advice From the Professionals
Don’t wait until you’ve started to rent out a property or until you’ve sold it before you contact an accountant, because by this time all they can help you with is the calculation and submission of tax returns. However, if you establish a good relationship with an accountant when you first acquire a property, they can then make you aware of your options from the beginning and help you plan accordingly to help manage your tax liability.
In addition, you may also want to speak to letting agents who specialise in letting properties in the area where your property is located, so they can help you find a good tenant or offer advice on rental rates.
If anything you have read here has raised more questions, feel free to get in touch here to see how we can help you.