10th February 2022
general
Property can produce both income and capital growth. The ability to borrow, rather than relying entirely on your own capital, can make the deal seem even more attractive.
The tax regime has gradually been tightened to ensure that many of the tax benefits available for businesses and other types of investment do not apply to property investments. This is partly to keep the property market under control and ensure homes are available for those who wish to buy them.
However, the cost of living is increasing all the time, and many potential first time buyers will have to wait longer to get on the property ladder. Social housing is no longer an option for most, so it’s important that good quality rental properties remain available.
If you are considering entering the buy-to let-market, here is what you need to know about taxes.
Buying the Property
When you buy a residential property in England or Northern Ireland, this will normally be subject to stamp duty. This will range from 0% on the first £125,000, to up to 12% if the property is valued at over £5 million. Full details on the rates and thresholds of stamp duty are available here.
However, if you are buying a second property and the value is over £40,000, you will pay a stamp duty surcharge of 3%. This applies even if your main home is abroad – in fact, an additional surcharge of 2% applies to non-UK residents.
So if you buy a main residence for £200,000, the stamp duty will be £1,500. However, if you buy a second property of the same value, you will pay stamp duty of £7,500.
Relief is available if you buy a new main residence before you sell your previous one, but this does not help buy-to-let investors.
The rates are slightly different in Scotland and Wales, but in both cases the surcharge is even higher, at 4%.
The additional costs are a significant barrier in buying a second property, so you should think carefully before proceeding.
Renting it Out
Most people buy a second property in the hope of generating an income. This income is taxable in the same way as earnings from a business or investment. You can set your personal allowance (currently £12,570 per year) against your property rental income, so if you have little or no other income, it’s possible you won’t pay any tax.
But property rental differs from other types of income in the following ways:
This can mean that the opportunities for tax planning are limited.
However, you can claim expenses against your property income. This can include insurance costs, routine maintenance, and agents’ fees. You have two options:
Prior to 2017, landlords could claim mortgage interest as an allowable expense. This has now been capped at the basic rate of 20%, reducing the amount of tax relief available for higher rate taxpayers.
Selling the Property
If you sell the property at a profit, it is likely that you will pay capital gains tax on the disposal. This applies even if you give the property away or sell it to a family member at a reduced price – in these situations, the full market value is used as the notional sale price.
Your gain is calculated as the sale price, minus the purchase price (or the probate value if you inherited the property), minus any allowable costs. These costs can include estate agent or legal fees, or the cost of any building work to improve the property or put it into a habitable condition.
You can set your annual exemption against the gain. This is £12,300 for the 2021/2022 tax year. If the gain is less than this, you won’t pay any tax. Couples can set both exemptions against gains on jointly owned properties.
If you have made a loss on other investments, you can also use that to reduce the taxable gain.
The rates of tax are:
These rates are higher than those applied to other investments (10% and 20% respectively), which is another example of how the tax system does not favour buy-to-let investors.
What Happens if You Die?
The property will be considered within your estate for Inheritance Tax (IHT) purposes. If your estate is valued at over £325,000 (or £650,000 for a couple), IHT of 40% will be charged on the excess.
Even if letting property is your main business activity, property businesses rarely qualify for business relief except in specific circumstances. Shares in a trading business, on the other hand, could benefit from 100% relief from IHT.
Tips for Investing in Property Tax-Efficiently
Buying, selling, and letting property can be costly and complicated. If you are still keen to invest in property, after understanding the full tax implications, consider the following:
Please do not hesitate to contact a member of the team if you would like to find out more about investing and tax planning.
