With the changes announced in the autumn budget, a thorough review of your financial arrangements is more important this tax year end than ever. Capital Gains Tax (CGT) allowances are being reduced starting from April as well as tax on dividend income being set to increase. This is in addition to the usual planning considerations revolving around the hardy perennials of pension and ISA contributions. There is plenty on these tax changes in the Sunday papers, so I won’t overegg the pudding by going over the detail in this article. If you have a financial adviser, he or she should be talking to you by now to cover the planning scenarios you should be considering.
On the investment front times have been tough over the past 12 months for obvious reasons, although the FTSE has somehow been defying gravity. At the sharp end, however you will have noticed massive increases in energy costs, skyrocketing borrowing costs if you are a borrower, and worrying inflation. Given there’s only so much belt-tightening that can be done, many of the lesser fortunate among us are suffering difficult times. Wealth is relative, however and even those of us more fortunate are feeling the pinch.
A case in the point is the buy to let property market. Typically when investing in property the OPM system is the preferred system: Other People’s Money. Borrowing enables you to build up a handy portfolio of properties with limited personal cash input. In this area however circumstances have combined to unpleasant effect: rising interest rates and changes to personal taxation.
If you have been enjoying the cushion of a fixed rate mortgage deal that’s fine, but the problem arises when the fixed rate term ends. You can suddenly find the cost of financing your monthly mortgage repayments isn’t remotely covered by your rental income after expenses. To add insult to injury, you will be taxed on your rental income despite the significant increase in your borrowing costs. Over recent years the amount of mortgage interest that you can set against rental profit has been gradually reducing tax year on tax year to nothing. This double-whammy is nobody’s idea of fun!
One of the follow-on effects of this is a glut of investment properties going onto the market, with landlords fleeing the sinking ship. This has the predictable effect of depressing sale values. Clearly this effect is variable depending on the location, type of property and various other factors, but you may well find that your buy to let property isn’t worth what it was a year or two ago.
If you are in a position where it makes sense to offload, then you need to be aware of the CGT implications. It’s a bit late in the day, but if you can complete your sale before 5th April, your annual CGT allowance will be twice the amount as compared to after 6th April. This could amount to a saving of up to £3,528 in tax payable for a jointly owned property, which is definitely worth having in the back pocket!
In the event you want to hold on to your investment properties but are being hit by the removal of the mortgage finance offset as a business expense, an alternative would be to hold them in a limited company. 100% of the interest payments would then indeed be treated as a business expense and these costs can be used to offset profits from the rental income. As ever, there are pros and cons to taking this route, and there are other tax implications to bear in mind, so taking professional advice is recommended.
If you do decide to sell up, you need to be aware that the government has been tinkering over recent years with the rules governing disposal of property not covered by the main residence exemption. The current version of the rules says that you need to file a CGT return to HMRC and settle any tax due within 60 days of the date of the sale completing. If you were unaware of this, then you wouldn’t be alone in our experience. Do speak to your accountant early on in the process to make sure all the ducks are properly in line for when the time comes to file the CGT return. Failure to do so will result in you having to pay penalties.
And on the subject of property disposals and CGT, remember that if you decide to gift a property to your children for example, then this counts as a disposal for CGT purposes and needs to be declared to HMRC. Completing the sale or transfer of your property before the end of the tax year can therefore be beneficial, bearing in mind the upcoming changes.
Where you can realise a loss on an investment of whatever sort before the end of the tax year, then doing so would be particularly useful. This would mean that you could offset some or all of the gain made on the property sale, which would result in a lower tax bill. Do remember however that if the transaction completes after the end of the tax year, it can’t be carried back, as is the case with some tax allowances. It can only be carried forward, which may not be a lot of help if you are disposing of a property in the current tax year.
Frequently the planning I’ve been describing requires collaboration between the adviser, who has put in place various investments, and your accountant. Unless you are confident you can deal with it on your own, it’s worth taking professional advice. On which note, please feel free to get in touch with us, if you think we can be of use. There is no cost or obligation attaching to an initial telephone consultation.
Joe Coten is a member of the Personal Finance Society. He may be reached on 0207 588 9626.