Many families are in the early stages of considering estate planning for the future, seeking out some type of stable investment that achieves better return on investment than currently low interest rates provide on investments. Here, I recommend property investment to achieve a stable, moderate return on investment along with a steady income stream that will last into the future.
Property offers two types of financial benefit: an income stream and a saleable asset in the future. As an income stream, monthly rents help pay for the mortgage, management fees, taxes, etc., and give you extra income during your working years and perhaps a supplement to your pension. The net rental profit is taxed as ordinary income, but owners are allowed certain expenses, such as agent fees, some legal fees, accountant fees, insurance, interest on property loans, maintenance and repairs, utilities, Council Tax, advertisements and ground rents. This is not an exhaustive list. Capital costs (such as furnishings) are not deductible as an expense, but they can be used as allowances. You get to choose either an allowance based upon ‘wear and tear’ or ‘renewals’. The allowance for wear and tear is 10pc of net rent. The renewals allowance covers the replacement cost of furniture or equipment for the letting.
If you choose to sell the property down the road, you will have to pay capital gains tax. The rate is calculated on net gain (after expense and allowance) and runs between 10 to 28pc, depending on your circumstances. Property can be transferred between spouses or domestic partners without capital gains, but not to children or other relatives. Capital gains is payable when the asset is sold, not when it is inherited. It is separate from inheritance tax.
A good tax accountant or estate planner can help you address issues of income and capital gains taxes associated with your property investment. They are worth their weight in gold.