6. Property and structured products Flashcards
4 advantages of investing in residential property
- Prospect of income through rent;
- The prospect of capital growth through rising property values;
- Relatively small initial outlay (the deposit) if the purchase is mortgaged;
- An investment in a tangible asset.
4 disadvantages of investing in residential property
- No tentants = no income + losses
- Wear and tear costs
- Quality of tenants not guaranteed
- House prices not guaranteed to rise (only an issue if whish to sell)
- Non Liquid.
Legal feels high
* Buying – solicitor’s fees, stamp duty land tax/Land and Buildings Transaction Tax/
land transfer tax valuation, searches, mortgage fees, etc;
* Selling – estate agent’s fees, solicitor’s fees.
Buy-to-let rental property mortgages - maximum loan to value?
it is possible to arrange buy‑to‑let mortgages for up to 75 per cent or so of the property value. Rates are on a par with standard mortgages
How to calculate rental yield?
Gross rent less expenses (Excluding morgtgae costs) ÷ Property and acquitison costs
*Excluding mortgage payments allows the direct comparison of yields regardless of financing.
3 advantages of investing in Commercial property
- The potential for capital growth – although this is not always the case;
- The potential for growing** income;**
- That it can help to balance a much larger investment portfolio - diversification
6 disadvantages of investing in Commercial property
- Ill-liquidity
- availability - Not as readily available as residential property
- Need for ongoing management + costs
- High costs
- Lack of tentants - Everyone needs somewhere to live, not everyone needs to rent a commerical property.
- Greater vulnerablity due to economic conditions
Tax - The individual’s principal residence - rental income.
Which scheme? How much?
6.1.4 Taxation of directly held property
Rent a Room Scheme
* Property owner rents out furnished room (or rooms)
* Can receive an income of up to £7,500 tax free
* This threshold is halved if sharing the income with another party.
If above £7,500 = self assement
* Taxed on total rent less expenses or
* taxed on the excess over the threshold but with no deduction for expenses.
An individual’s primary principle residence is exempt from CGT, so long as:
- Main residence
- Land up to 0.5 (1 acre) that forms part of the property are also exempt.
- Those who live in job‑related accommodation can claim another property as their main residence.
- If multiple properties, there is a window to elect a main residence - within two years of pruchase
- Can delay occupying the main residence by up to 12 months after pruchase without affecting exemption
- Must have been main residence for the last 9 months to recieve exemption.
Exemption may be affected if:
* Part of the poperted is used for commercial reasons
Residential and commercial rented property - Which taxes apply?
National insurance?
Income tax
* Reported via self assessment if the income is above certain thresholds
* The first £1,000 is tax-free
* Allowable expenses may be deducted or ‘set against’ this tax charge
CGT
* Payable on sale of property.
Stamp duty land tax
* Buy-to-let and second homes: pay an additional stamp duty on properties with a purchase price greater than £40,000.
* This additional SDLT is 3%
National Insurance contributions on rental income
Landlords will pay Class 2 NI contributions
* or class 3 if it is not their main job.
Additionally, if the landlord provides substantial additional services, such as laundy, cleaning, or regular meals as part of the rental package, the rent can be classed as trading income
* Class 4 NICs are due.
How much is a landlord’s ‘Property allowance’?
When must a self-assessment be completed?
The first £1000 of rental income is tax-free
Self assessment must be completed if income is:
* £2,500 after allowable expenses
* £10,000 before allowable expenses
If a landlord provides substaintial additional services as part of the rental package…
What happens? What are the advantages?
Then the income from rent can be classed as trading income
Although class 4 NICs will be payable, there are advantanges:
- Accounts can be drawn up to any date, rather than 5 April.
- There is more scope to set off losses against other income.
- The income is regarded as earned income from a business, which means it can be used to substantiate pension contributions.
- CGT business reliefs may be available.
Stamp duty land tax - Residential
What is it? Rates and exemptions?
A tax payable if you purchase propert or and over a certain value.
Thresholds for Zero SDLT
* £250,000 for residential properties
* £425,000 for first-time buyers so long as the propert is valued at £625,000 or less
* £150,000 for non-residential land and properties
Rates:
* Up to £250,000 = Zero
* The next £675,000 (£250,001 to £925,000) = 5%
* The next £575,000 (£925,001 to £1.5m) = 10%
* The remaining amount (Above £1.5m) = 12%
Stamp duty land tax - buy to let and second homes
Pay an additional SDLT tax charge in addition to the ‘normal’ SDLT.
* This is currently 3%
* And is charged on the entire purchase price not on the amount above the normal thresholds - even if this value is under thresholds.
What costs can be deducted from a landlord’s income tax bill as an ‘allowable expense’?
- Repairs
- Wear and tear - I.e. replacing furnishings
- Mortgage interest -receive 20% tax credit on interest received
CGT on rental property sale - what can be deducted
- Buying and selling costs
- SDLT
Both can be offset against the gain
