Buy-to-let tax warning

Citation

(2002), "Buy-to-let tax warning", Property Management, Vol. 20 No. 5. https://doi.org/10.1108/pm.2002.11320eab.009

Buy-to-let tax warning

Buy-to-let tax warning

With the bottom dropping out of the buy-to-let housing market the Chancellor is not making it any easier, a London firm of chartered accountants is warning.

David Rothenberg of Blick Rothenberg said: "There have been many warnings that the buy to let market may be overheating … and many buyers coming in at the top of the market could have their fingers burned. Additionally, however, they may have overlooked the fact that the current tax regime for buy to let housing is quite unhelpful to landlords for whom this may be the last straw."

David Rothenberg warns that a host of expenses incurred as a matter of course by landlords are not allowable as a charge against their income tax liabilities on letting income. He says: "For example, legal costs and stamp duty on the purchase of the property are not eligible as a charge against income tax. Refurbishment of premises, before letting, is similarly not allowed as a charge. In both cases the only relief is against the eventual capital gains tax charge on a sale, often many years later. Travel costs of the landlord to and from the property are not allowed. And if there is a loss in letting activity in any year (for example through non letting, high repair costs or high interest charges) this cannot be offset against income from other sources but has to be carried forward against future income from property. All of this could prove to be a tax nightmare which arrives as a nasty surprise just as cash flow dries up if a property cannot be let."

The capital gains tax regime is also not very favourable. As there is no business taper relief (which can be claimed on investments in private company shares) capital gains tax is chargeable at relatively high rates – after ten years it is still charged at a top rate of 24 per cent compared with 10 per cent for investments in private businesses, achieved after only two years.

These rules are relaxed for "furnished holiday lets", which are treated as a conventional business so that losses can be deducted from other income and business taper relief enjoyed.

Similarly, inheritance tax is payable in full on death, and there is no business property relief as is the case for investments in private businesses. As the letting of investment property with all the necessity for repairs and maintenance, etc. is in effect a business, this penalisation seems unfair.

David Rothenberg added: "Unfortunately there is no easy way round this penalisation as all alternative structures have commensurate disadvantages. People should be very careful about buying to let as an investment – it's not as straightforward as it seems."