A TAXING QUESTION  

My Husband and I have decided that when we retire we would like to live in the country.  We have seen a cottage outside Ayr that we would like to buy but, as we are unable to move from Glasgow for at least five years, I wondered what the tax and other implications would be if we were to let it through an Agency in the meantime?

The beauty of letting property is that it opens all kinds of benefits to Landlords and you do not need to have a large number of properties to gain these benefits.  You have highlighted a key opportunity for people looking for a solution of where to live on retirement and, with low cost mortgages, now is the time to buy another property.  Why not buy that country home you want now and let it grow in value while your tenants pay off any mortgage on it? 

Letting is a business and you will be required to pay income tax on the letting income, subject to any allowable deductions.  Such deductions may include mortgage interest relief against rental income, provided that the property is let at a commercial rent and the lease is for at least 26 weeks. Repair, replacement and maintenance costs may also be deductible, provided it is incurred by reason of dilapidation during the period the property has been leased.

Add to these management costs (Letting Agency fees, legal or accountancy charges), periodical payments such as feu duty or factoring costs, council tax (if you have remained liable for it), insurance costs (such as rental protection, buildings and contents) and services that you are obliged to provide for the tenants, but for which you receive no specific payment.

You are also entitled to a deduction, if the property is furnished, to cover depreciation on furnishings, fittings and furniture.  This is usually an allowance of ten per cent on annual rents.  If in any year, your expenses are greater than the rent that you have received, you may be able to carry forward the result any loss to set against future income from the property.  

You will be responsible for your dealings with the Inland Revenue and as an Agency Key-Lets supplies a monthly statement to all our Landlords for tax purposes.  The Inland Revenue does not require Letting Agents to deduct tax from rentals paid to Landlords resident in the UK.  Your friendly accountant, financial advisor or local tax officers are the best people to speak to regarding your specific allowances and deductions.

If in the next five years you choose to live abroad you encounter a different tax situation. A Letting Agent is required by law to deduct the standard rate of tax from any rental paid where a Landlord is resident outside the UK for tax purposes.  The Landlord can then reclaim the tax where appropriate.

A Letting Agent need not deduct tax from rental income if a Landlord has a current Tax Exemption Certificate.  Key-Lets is registered within the Overseas Landlords Scheme and can liase directly with the Inland Revenue regarding exemption certificate applications.

Your question raises further issues regarding Capital Gains tax and Inheritance tax.  A house, which is an only or main residence and has been throughout the period of ownership, is exempt from capital gains tax when it is sold.  Therefore your current Glasgow property should be free of Capital Gains tax on its sale.

If however the second property is let out for a period and thereafter used as your main residence and later sold, a capital gains liability may well occur.  The amount of any exemption for capital gains tax purposes will be calculated by taking the length of time during which you occupy the property and dividing this by the period of ownership.  The capital gains are reduced by this fraction.

Where you own more than one property, it may be possible to elect which one is to be treated as your main residence.  This election has to be within two years of the purchase of the additional property.

On purchasing your country cottage you may need to improve it to make it an attractive proposition to let.  Most working tenants look for properties with a minimum standard of comfort.  Generally this means double-glazing, gas or oil fired central heating, well-equipped kitchens and bathrooms.  Garages, satellite or cable TV and burglar alarms all add value to a home that will achieve a premium rental.

Occasionally Landlords resent upgrading property that they do not live in.  Conditions internally and externally are as important as location and price when seeking good tenants.  Equally safety legislation regarding furniture, gas and electricity can have dire consequences for Landlords and Letting Agents who wilfully ignore their obligations. Pleading ignorance if old wiring electrocutes a tenant, or a faulty gas appliance affects a tenant’s health, is not acceptable in court as others have found to their cost. 

The costs of any structural alterations and improvements to the property can be claimed against a capital gains liability on the sale of the property.  Costs for repair and maintenance can be put against your rental income as we discussed last week.  Over the years we have built up a core of reliable tradesmen who offer very competitive quotes to our Landlords for property repairs and improvements.

Having bought your cottage, upgraded it and successfully let it through Key-Lets, you may decide that buying property to rent is a pretty good idea.  Indeed if the rental return exceeds the returns offered by other investment vehicles, then you may be tempted to buy yet further properties. Key-Lets can help again in terms of property searches and Buy-to-Let mortgages.

Be aware however that building a successful property portfolio also adds to an Inheritance Tax liability on your death.  Once again your friendly accountant, financial advisor or local tax officers are the best people to speak to regarding specific inheritance tax liabilities and solutions.