Location, Location, Taxation!
Tax savings for second-home owners
Manju Ghosh, Senior Tax Manager at Rouse Partners explains more about the tax issues surrounding second homes.
With aspirations to purchase buy-to-let and holiday homes increasing and changes in society leading to later marriages and more divorces, it is little wonder that numbers owning more than one property in Britain have been rising in recent times.
When it comes to second-homes and property portfolios, location isn't the only factor that will affect your eventual return on investment. The risk that those who have invested in second properties will face substantial bills from the taxman is increasing.
Your home is your tax refuge
Everyone's main home (or principal private residence/PPR) subject to area, is exempt from capital gains tax (CGT) when sold, other properties are not.
Any property that has been your PPR for a reasonable period attracts an automatic 36 month tax free gain allowance. Where your PPR has also been rented out there can be a further relief of up to £40,000 per owner.
Furnished holiday lets new legislation
For those with furnished holiday lets there is new legislation that you should be aware of. Whilst some aspects of this favourable tax regime have been retained, new more restrictive conditions and amended loss relief provisions make it overall considerably less generous. For more details you should speak to your advisor.
Your net rental income will be taxed at your highest rate and therefore it is essential that you can offset this with as many expenses as possible. You should ensure that any mortgage is linked to your investment property, not your PPR.
Where possible and taking into account each person's personal tax circumstances, it can be beneficial to alter the ownership of the property(ies). Generally UK land can be held as joint tenants when the owners hold an equal undivided interest in the property, or as tenants-in-common where the individuals hold separate and identifiable shares, say 10% and 90% of the property (the legal terms may differ under Scottish law).
Passing it on
Not only can 2nd properties create income tax and CGT issues, they can lead to substantial Inheritance Tax (IHT) liabilities if action is not taken at the appropriate time.
IHT can be mitigated with simple lifetime gifts, Trusts, complicated loans and leasebacks. Not all will be appropriate to your circumstances but with IHT rates at 40% it is essential to take proper advice.
It is not always right to jump the gun with regard to IHT mitigation, especially where it interacts with CGT. There also can be issues with Gifts with Reservation where the donor continues to use the asset gifted but this can be planned tax effectively.
Further tax saving opportunities
There are also other factors that allow relief from capital gains tax and you should consider:
- Offsetting other losses;
- Claiming all relevant allowances and reliefs; and
- Using a limited company
Rouse Partners are holding an event in November to look at each of these areas in greater depth. For more information and to register for this free event please visit http://www.rousepartners.co.uk/secondhomes/
RM2 is pleased to recommend Rouse Partners LLP's services. If you want to know more about the tax issues surrounding second homes then contact Rouse Partners LLP on 01494 675321 or visit their website http://www.rousepartners.co.uk/
This article has been produced by Rouse Partners LLP for general interest. No responsibility for loss is occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.