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Rental returns
"Buy-to-let" has been a popular investment over the past few years. Returns have dipped recently - if property prices rise out of step with rents, then the income is only a very small percentage of the investment - but they are apparently on the rise again.
Of course, the income return is not what most people have their eyes on. If the rent covers the expenses, including the mortgage interest, that means the investment breaks even until it can be sold for a capital gain.
A word of warning - in general, that capital gain is not favourably taxed. Unless the property is a "furnished holiday letting", it will not benefit from the low CGT rates applicable to "business assets". And a house is fully chargeable to CGT unless you have at some time lived in it as your only or main residence.
There are a number of ways to enjoy a better tax treatment of the gain, first among them the idea of "buy-to-move and rent the old house". That may not suit your plans, but if it does, the advantages are significant. If you are interested in buy-to-let, we will be happy to discuss the tax consequences with you.
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The increase in returns on buy-to-let is reported in the Sunday Telegraph money section, 14 September.
The idea of "buy-to-let and rent the old house" benefits from the only or main residence exemption. The last three years of ownership will be exempt from
CGT, even if the property has been let throughout those years; there will then be an additional exemption (of up to £40,000) for letting a property which has been the
OMR. For example, if someone lives in a property for two years, then lets it out for five years, the chargeable gain would be only 2/7 of the total; if that was larger than £40,000, the result would be reduced by 25% non-business taper relief. In order to exceed the annual exemption of £7,900, the total gain on the property would have to be ([£7,900 x 100/75] + £40,000) x 7/2 = £176,867. Every £1 of gain above that figure would only suffer an effective rate of tax of 40% x (2/7) x 75%, or 8.6%.
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