When it comes to investing in property, most of us think of buy-to-let or corporate property funds, but experts say that your own home is one of the most tax-efficient savings vehicles available.
Last week the Institute for Fiscal Studies released a report on the effect of taxes and charges on a variety of forms of saving. “Investment in owner-occupied housing is significantly more tax-advantaged than investment in property to let,” it said.
There are a many ways in which your main home is treated differently by the taxman to second homes or buy-to-let properties, which make it an attractive place to stash your cash.
“Owner-occupied housing is essentially untaxed once you’ve bought it. With buy-to-let, the landlord has to pay income tax on rental income and capital gains tax if the property rises in value,” says Stuart Adam, one of the authors of the report.
Once you’ve paid stamp duty on the purchase of your home you are free to enjoy any capital gains made. This can make renovating your property and paying off your mortgage a savvy way to use your money.
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David Wesley-Yates, a chartered tax adviser at Red & Black, the accountant, says if you put money into improvements, make sure you keep a record of what you spent, because if your circumstances change you could land yourself with a tax bill. “Relief from capital gains tax is available, provided you qualify for principal-residence relief,” he says. “If you are assessed for capital gains on your home, the cost of any improvements can be deducted.”
Your home may soon be an attractive investment for inheritance tax (IHT) purposes too. From April 6, 2017, an additional nil-rate band for IHT will be introduced if you leave your main home to a child or grandchild. With spouses able to pass this allowance between them it means a family home worth up to £1 million could be passed on without incurring inheritance tax by 2020. “Assets transferred on a death estate are free of capital gains tax and with this relief there is increased scope to bequeath one’s home free of inheritance tax,” Mr Wesley-Yates says. “Other assets might be subject to inheritance tax at 40 per cent.”
However, there is a drawback to investing in your own home — property prices can go down as well as up. Sitting back and assuming that your home is going to make you a big capital gain is risky. This is mitigated in buy-to-let by the potential to earn an income. However, if you are looking to draw an income from property then, again, owner-occupied properties offer a tax advantage. “A buy-to-let landlord must pay income tax on his rental returns,” Mr Adam says, “whereas if you rent out a room in your home, the income may be tax free.” This is because of the government’s Rent a Room Scheme, which allows people to earn a tax-free income from a lodger. You can earn up to £4,250 a year renting out a furnished room, rising to £7,500 from April.
“With average annual lodger rents at £5,088, renting out a room is a great way to make some extra money,” says Matt Hutchinson, the director of SpareRoom.co.uk. “People in 97 per cent of the UK’s biggest towns and cities won’t pay tax on their income.”
Jan Knight has been taking advantage of the Rent a Room Scheme. “We’ve had lodgers, on and off, for 30 years,” says Ms Knight, from Willesden Green in London. “We stopped for a few years while we were bringing up children but when our sons left home their rooms were doing nothing, so we decided to rent them out.”
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Those two rooms provide the Knights with £950 in income a month. Once the new tax-free allowance is factored in, that’s a net annual income of £10,620 for a basic-rate taxpayer. If you don’t like the idea of sharing your home full time you could occasionally rent out a room on websites such as Airbnb.