Brit’s are property lovers, we love to buy our home and whether we can afford it or not, we like to buy rental properties, we saw annual house price growth of 5% in September which seems to be the result of post-lockdown demand, which remains strong even in the shadow of economic uncertainty and rising unemployment.
I, on the other hand, am not a property lover, I appreciate the desire to own your home, but I feel as an investment they are expensive and risky and second homes are rarely enjoyed as much as the dream of owning one. However, I shouldn’t hold my personal views against the wishes of others, so this week I’ll cover off some important points regarding property investing.
There have been a number of recent tax changes that adversely affect buy-to-let investors; the introduction of a 3% Stamp Duty Land Tax (SDLT) surcharge, the removal of higher rate tax relief on mortgage interest paid on borrowing and a tightening of the capital gains tax (CGT) rules that apply to the disposal of buy-to-let properties, in terms of restrictions on lettings relief and principal private residence relief, and a shorter payment deadline for CGT on residential property gains.
Therefore there is a greater need to consider planning action to maximise use of allowances, reliefs and exemptions to combat some of these negative tax changes.
There is currently a SDLT holiday and there is no SDLT on the first £500,000 of the purchase price of a residential property. This applies on purchases that are completed on or before 31 March 2021. It also applies to the purchase of additional residential properties although the 3% surcharge still exists. This means on the purchase of a buy-to-let property, it could save up to £15,000.
With the CGT rules tightening and indeed the prospect of the rate of CGT increasing in the future, those who own buy-to-let properties in single ownership, who are married or in a civil partnership, could consider a transfer into joint ownership. This will mean that on a later sale each owner should have their own CGT annual exemption available for offset against the capital gain. This is currently £12,300 and for a higher rate taxpayer could save up to £3,444 in tax (£12,300 @ 28%). If the new joint owner is a basic rate taxpayer, gains that fall within that owner’s basic rate tax band will be taxed at 18% thus saving up to £2,214.
For those who are married or in a civil partnership, transfers into joint ownership should not incur inheritance tax, or CGT, provided they are living together although SDLT could become relevant where the new owner assumes responsibility for more than £40,000 of an existing mortgage. Of course, joint ownership would need to be acceptable to the current owner and the lender (if any).
Where a couple currently jointly own a buy-to-let property, rent will normally be taxed on a 50/50 basis. But is this tax-efficient where one owner is a higher rate taxpayer and one a non, or basic rate taxpayer? Probably not, but in considering this subject, there is much more to think about than meets the eye.
Where two or more persons are the joint registered owners of property, such as a buy-to-let investment, they will usually hold the property on trust for themselves either as beneficial joint tenants or as beneficial tenants in common.
As the taxation of income is based on beneficial, rather than legal ownership, the general rule is that with joint tenancy they will be taxed equally on any rental income that is generated by the investment; whereas if the property is held on a beneficial tenancy in common, they will be taxed in the proportions in which they actually own the property.
This position is, however, modified where the joint owners are a married couple or civil partners living together. In such cases, the income tax legislation treats the couple as beneficially entitled to the income in equal shares regardless of their actual receipt or entitlement position. The consequence is that they are taxable on the rental income in equal shares.
Of course, in many cases there may be a desire to split the rental income other than equally – perhaps to take advantage of the lower tax position of one of the co-owners. Fortunately, the legislation allows the co-owning spouses (or civil partners) to elect to be taxed on their actual entitlement to income – thereby overriding the usual rule – by completing and submitting Form 17 (‘Declaration of beneficial interests in joint property and income’).
Having completed Form 17, setting out the specific property and income to which it relates, it must be signed by both parties. It is important to note that any split of income must be in line with the actual underlying entitlement to beneficial ownership.
Once a declaration is made it remains in force until the couple’s interests in the property or income change, or they stop living together as a married couple/civil partners.
Note that the completion of Form 17 implicitly means that the beneficial ownership of the property is changed to that of ‘tenants in common’ (not ‘joint tenancy’). This means that, on the death of one spouse or civil partner, the other will not automatically inherit the deceased spouse’s/deceased civil partner’s share of the property. It is important therefore that a Will should be drawn up by each spouse/civil partner to deal with their share of the property and it can be very beneficial that the deceased share in the property is left in the will into trust and not to the survivor, but that’s a whole nother article.
The risk of being a victim of property fraud is greater than ever and particularly high if you are a landlord. Property fraud is where fraudsters try to “steal” your property. Property is usually the most valuable asset people own. It can be sold and mortgaged to raise money and can therefore be an attractive target for fraudsters. A fraudster might forge documents to convince a mortgage lender or solicitor that they own the property, and mortgage your property without your knowledge. The fraudster might also use identity theft to impersonate a seller and obtain the proceeds from the sale of the property. You are particularly at risk of fraud if you rent out your property, you live overseas or the property is left empty.
Since 2009, the Land Registry has succeeded in stopping the registration of fraudulent transactions against properties worth more than £74 million.
I recommend that everyone registers their property with the land registry, although land registration was available since 1925, it wasn’t until 1990 when it was compulsory for the whole of England and Wales to be subject to compulsory registration.
The Land Registry offers Property Alert, which is an award-winning free property monitoring service aimed at anyone who feels a registered property could be at risk from fraud. I recommend everyone registers their properties with The Land Registry, once you have signed up to the service, you will receive email alerts when certain activity occurs on your monitored properties, allowing you to take action if necessary.