The key changes in tax on Property Investments

There have been a number of changes to the way people who have buy to let properties are taxed as follows:

• Stamp duty – individuals face a stamp duty surcharge of 3% when purchasing a 2nd home unless they are replacing their primary residence. This would include those who already own one residential property and are purchasing an additional property to rent out
• Capital gains tax – when selling a property, buy-to-let investors pay higher taxes on capital gains than investors in other asset classes
• Mortgage interest relief – restrictions on tax relief on mortgage interest means that the tax relief Higher Rate Taxpayers receive from rental income may reduce the net income some landlords will receive

Comparing rental properties with other asset classes, there are a number of other changes:

• Tax allowances on investments and shares mean these are now potentially more attractive such as lower capital gains tax rates and new tax-free allowances on savings interest and dividends
• The annual ISA subscription limit is now £20,000, enabling investors to build a pot of tax-free assets more quickly (NB ISAs are not free from Inheritance Tax unless invested in AIM shares/Business Property Relief)

Examples

To make a comparison, let’s look at two clients who have £200,000 to invest. Mrs Property purchases a 2 bed property and rents it out, Mrs Investment invests into a moderate portfolio utilising her ISA allowance and invests the rest in OEICs moving into their ISA each year to use their ISA allowance.

What do they each pay?

On Purchase

Stamp Duty

Professional Fees

So far, the BTL has cost £9,500 on top of the price of the property. Everything being equal, the property will have to return £3,000 more than the investment in order to match the investment.

Ongoing charges

On disposal

Let’s assume they both sell after 5 years.

Over the 5 years Mrs Investment has utilised some of her CGT and all of her ISA allowances each year by moving £20,000 from her GIA to ISA each year. At the end of 5 years, she has invested £100,000 into an ISA.

Both the property and investment have grown in value by £50,000.

The property is now worth £250,000 and Mrs Investment has £125,000 in ISAs and £125,000 in her GIA.

Capital Gains Tax

 Capital gains tax on the sale of a second property can be offset with the stamp duty, buying & selling costs and any home improvement costs (normal maintenance such as decorating does not count).

There is a really handy calculator on the HMRC website that can help you calculate the tax to pay on the disposal of a property. You can access it here.

Risks of investing in property

There are a number of risks of investing in property which are not always apparent. Some of these are as follows:

• Falling property prices – although property prices have risen for many years, prices can go down as well as up
• Liquidity – buying and selling properties takes time, which locks up capital. A forced sale nearly always means accepting a price considerably below market value. If you want to raise some capital, you can’t just sell the bathroom.
• Lack of diversity risk – for many investors, owning buy-to-lets means that their investments are concentrated in one asset, in one sector (property), in one economy (the UK). A diversified portfolio, in contrast, is typically invested across multiple sectors, industries and countries
• Void risk – the property may be vacant for extended periods of time which means that there will be no rent to cover any mortgage repayments
• Maintenance risk – properties need regular maintenance and upkeep – this can be expensive
• Mortgage risk – interest rates may mean that mortgage repayments increase and reduce the profitability of the property
• Lifestyle risk – being a landlord can be stressful and time consuming, even for those that employ a managing agent

Conclusion

There are of course risks of investing in assets other than Property – you may not get back as much as you invested, past performance is not a guide to future performance, and fund values can fall as well as rise.

Where it used to be compelling to invest in property, the case is no longer quite so water tight. If you are considering investing in property, make sure you fully understand the associated risks, costs and taxes before doing so. If in doubt, speak to an Independent Financial Adviser or Accountant.

The small print

Tax rules, rates and allowances are all subject to change and are dependent on individual circumstances. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested

The post Buy to Let vs Investments appeared first on Alice Douglass.

When buying a house

When you are in the process of buying a home, you should speak to a financial or mortgage adviser. An adviser in this situation can help find the most suitable mortgage for your circumstances.  Whether it be repayment, interest only, fixed or variable interest rate, an adviser will ask suitable questions to find the best fit. They will also have knowledge of which providers consider certain circumstances. Such as someone with one year’s accounts, a zero hour’s contract or a job offer only for example. This would save you time in searching the market yourself.

An adviser will also help you to consider how you would continue to pay the mortgage should anything happen to you.  For example; inability to work, being diagnosed with a critical illness or if you should die. They would be able to recommend suitable protection products to insure against these eventualities. This is something that people often overlook. But imagine if the worst happened and then you had to leave your home because you could no longer pay the mortgage.

You may also want to consider talking to a Financial Adviser if you are considering a buy to let investment. Due to tax changes, this isn’t as attractive as it once was and other alternatives may be more suitable to your requirements.

On marriage or when a baby is born

When you get married or have children, due to the change in circumstances, you may wish to provide an element of family protection. You may already have cover in place to protect your home – as detailed above. Family protection could provide additional insurance so that if anything should happen to you or your spouse, there would be either a pot of money or an amount each year or month to replace the lost income and provide breathing space.

You may also wish to talk to an adviser regarding planning for your child’s future and investing money for school fees or university fees. The sooner you start, the better.

It is also wise at this stage to talk to a Solicitor or Will writer to write your Wills.

On Divorce

So, you’ve just got married and now you’re getting divorced! Of course, none of us enter marriage thinking about divorce however, it does happen. Naturally, those getting divorced will speak to a solicitor however, it may also be wise to talk to a financial adviser. It is often the case that during divorce proceedings, the separate parties argue over certain assets. An adviser can help look at income requirements and cash flow to work towards a suitable and fair settlement rather than looking at assets alone. If the divorce involves pensions, an adviser can work with either party to get a fair amount for the recipient or to build the pension back up for the settlor.

When planning for retirement or have another specific goal or objective

When looking towards retirement, it is an important time to seek financial advice. However far off it is. If you don’t know what plans you have got, where these are invested, and what its worth or if it is going to meet your requirements in retirement, you should consider speaking to an adviser. They will help you arrange your plans so that they are structured and invested appropriately. They will also advise on the contributions required to meet your goals.

If you haven’t reviewed your pensions for 1-2 years or more, I would suggest that you do so. It is important to review financial plans regularly as legislation and regulations change as do personal circumstances. It would also be wise to speak to an adviser if and when you leave employment or change jobs.

At retirement

When you are approaching retirement or thinking about taking money out of pensions or investments, it would be wise to speak to a financial adviser. Although you may have in mind what you wish to do, this is a complex area and talking to a financial adviser could open up different avenues that you hadn’t considered and could save you money in the form of tax.

Death

When a loved one dies it is often the most difficult time in someone’s life. By talking to an adviser, following the death of a close relative, it can provide peace of mind. There may also be some important financial decisions to make such as what to do with an inheritance or making a death claim and how to generate an income from the proceeds.

Conclusion

Although not exhaustive, this blog has considered the question When should I talk to a financial adviser? If ever in doubt about your financial plans, speak to an adviser, it won’t hurt.

Tax rules, rates and allowances are all subject to change and are dependent on individual circumstances. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.

The post When should I talk to a financial adviser? appeared first on Alice Douglass.