I should make it clear at the outset that neither I nor Viceroy Invest are licensed or qualified to give tax advice. When it comes to choosing a particular tax-saving strategy you MUST discuss it with your qualified Accountant.

What we certainly can do, however, is spread some of the rules before you for your consideration and highlight some of the contentious and non-contentious areas.

Income Tax or Capital Gains Tax?

Generally speaking, if you are a regular investor who buys and holds rather than buying to sell on at a profit, you will be liable for Income Tax each year on the profits from your investment portfolio and Capital Gains Tax on the profit you make when you eventually sell.

I say "generally speaking" because there is a significant taxation difference between an "Investor" and a "Trader". We can cover this in a future edition of VIewpoint, but for now I am going to look at the conventional Buy to Let investor who (not surprisingly) buys and lets.

When you buy a property

None of the costs of acquiring the property are allowable against Income Tax. However, everything like solicitors' fees, surveyor's fees and stamp duty (as well as Viceroy Invest fees) can be added to the purchase price paid when eventually calculating the gain on disposal. So if you buy a property for (say) £150,000 and the fees and stamp duty amount to £5,000 in total, you are entitled to consider the original purchase price as £155,000 when calculating your capital gain. Keep all the documentation - you will need it one day!

When you let a property

The rent you receive is gross income but there are a number of allowable expenses which reduce this value for income tax purposes. The revenue use the "wholly and exclusively" rule to apply to allowable expenses, meaning that they must be incurred purely for the purpose of letting the property. If you have an investment property in Brighton, the cost of travelling there to supervise repairs to the property is an allowable expense. But if you spend a few days holiday while you are there, none of the travelling costs are allowable.

Allowable expenses include:

• Ground rent
• Service charge
• Insurances
• Repairs and maintenance to the building and electrical appliances
• Mortgage interest (but not repayments)
• Managing or Letting agents' fees
• Costs of advertising for tenants and fees for obtaining references
• Legal fees (e.g. for evicting non-paying tenants or for drawing up a Tenancy Agreement)
• Travelling costs to collect rent if you do it yourself
• 10% of gross rent received is allowable for wear and tear of furnishings, but if you choose to claim this you cannot then claim the costs of replacing furniture and carpets under "repairs and maintenance".
• All solicitors', valuers', brokers' and application fees for re-mortgaging a property. The extra interest you pay as the result of a larger mortgage is still an allowable expense provided the total mortgage is no more than the original purchase price of the property.

This does not claim to be a comprehensive list – there may well be other expenses which are also allowable.

With all those allowances, most investors (if they have a large mortgage) will show a loss each year for income tax purposes. These losses can be carried forward from year to year and are allowable as an expense in Capital Gains Tax calculations if there any left when you come to sell.

Unfortunately, the losses cannot be offset against any other current income; only against future rental income.

That's all for this month. Next month we'll take a look at Capital Gains Tax. Interestingly, some expenditure which is not allowable for income tax purposes can still be offset against future Capital Gains Tax. We will also consider the difference between Investor and Trader from a taxation point of view.

If in doubt – talk to a qualified accountant.

www.viceroyinvest.com

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