Tax Law Letter
Mr. And Mrs. Bob and Anna Diamond
I would like to start by thanking you for entrusting me with guiding you as you plan this next phase of your financial growth. Tax considerations are an important part of ensuring your financial independence and security at any time, and after retirement they can become some of the most significant factors and forces of change in a familys financial position. It is wonderful that you are pursuing your various options in such a considered and careful manner, and I am more than happy to help you in this process of growth and change in your lives.
It is my understanding that you are considering several different property purchases and other methods for generating income through the renting of properties you do or will own. Specifically, you are exploring the possibilities of letting out rooms in the house that you currently occupy, during school terms and on a non-renewing basis; furthermore, you are also considering the purchase of a seaside cottage to be let out on a short-term basis to holiday makers; finally, you are seeking to purchase several standard housing units for long-term rentals to residential tenants. It is also my understanding that these purchases will be made largely or entirely with cash already in your possession, primarily from an inheritance received following the passing of a relative. If I have erred in my assessment of your situation and considerations, please do let me know right away, as any change could affect the reliability of the information I can impart to you.
There are three distinct types of property purchases and rental schemes that you are exploring, and each of them is treated differently for tax and income purposes. Some of the laws regarding rental income taxes and general property taxes will be applicable in more than one of these areas, but overall tax liabilities and structure vary from standard residential rentals (i.e. The long-term tenant-occupied properties you are considering), furnished holiday rentals (assuming you plan on furnishing the seaside cottage you will be renting to holiday makers, which is pretty much a necessity in order to actually find tenants), and renting rooms in an owner-occupied home. By considering each of these specific areas separately, you will gain a better understanding of the tax liabilities for each specific type of property investment, and will be better able to select a mix that works for your situation and goals.
The income obtained from standard long-term residential rentals has a specific tax structure in the United Kingdom, generally treating any profits received from the business simply as additional income taxed at the same rate as your normal income. For residential lettings of this type, all properties are considered part of the same business, and thus contribute to the same income. This also means that losses from one property can be used to offset profits on another property, meaning taxes will only be assessed on total overall profits.
There are certain complications to the taxes assessed on rental property income, however, and it is through an understanding of these complexities that savings can be generated in this particular scenario. Specifically, understanding the allowable expenses from income received through letting can greatly reduce the tax burden that you will incur form this income. When calculating the net profit obtained fro rental income, there are several areas where deductions can be made before the income is started as profit. These deductions represent the greatest tax savings, as they are removed before the income from letting properties is ever even counted as income by Revenue. Other expenses related to letting can be listed as tax allowances, but this occurs after these amounts are counted as income and thus are not as beneficial from a tax savings perspective.
Allowable deductions before letting income is counted as profit include letting agents fees, legal fees incurred for lets of a year or renewals (as long as the terms of the lease are for a period of less than fifty years), accountants fees, insurance, interest on loans, maintenance and utility payments, Council Tax, and a list of other specific direct costs. Some of these expenses are less applicable to your situation than others, but you should consider these options carefully; it might be to your advantage to fund your property purchases through the use of borrowed funds, as the interest is tax deductible and could allow for more purchases and greater profitability, for.