What taxes do UK property investors need to be aware of?
Knowledge is power when it comes to property investment, so it’s vital to be well-informed about any taxes you may need to pay as a landlord.
In the UK, property investment remains one of the most popular and lucrative asset classes, thanks to its long-term stability and growth, with profits to be made through both rental income and capital appreciation when you come to sell up. This is why property investment can be an ideal retirement plan, as the longer you hold onto a property – provided you have invested wisely – the more money you stand to gain.
While there are strategies to employ that can cut your spending and boost your profits, taxes are normally an unavoidable part of the property investment and rental process. Of course, a good tax adviser can help you maximise your investment and be smart with tax, but the most important thing is to be aware of what you owe to avoid any nasty surprises.
Stamp duty land tax
This is first on the list simply because it is likely to be the first tax you pay on your property. The amount of stamp duty land tax (SDLT) you owe is based on the value of the property you are buying. If you’re a homeowner, you’re probably very familiar with SDLT, although it’s important to note that you are required to pay an additional 3% when investing in a property that is not your main residence. If you’re based overseas, you may also need to pay a 2% stamp duty surcharge when you buy UK residential property.
SDLT must be paid within 14 days of the purchase date. Depending on your circumstances, you might be able to add it onto your mortgage, but this will affect the amount of interest you pay on your borrowing. You can find out more and work out what you might owe on the stamp duty section of the government’s website.
If you rent your property out, you’ll probably need to pay income tax on your rental profits, provided you are earning over the minimum tax threshold (which normally changes annually). You can deduct certain allowable expenses from your rental income to reduce your final tax bill, which includes things like the cost of maintenance and repairs, redecorating expenses, insurance, and letting agent or management fees.
There are certain other reliefs you might be able to claim, too, such as replacement of domestic items relief – again, the best place to find out the finer details is on the relevant section of the government’s website. It is advisable to keep a record of all your expenses linked to your property or properties throughout the year, to make it easier to keep track of and to ensure you pay the correct tax.
How do I pay?
If your rental profits are below £2,500 per year, HMRC (HM Revenue & Customs) might be able to adjust your PAYE code through your employer to ensure you pay the correct tax. Any income above this amount means you’ll probably need to fill in a self-assessment tax return, giving details of your rental income and expenses for the tax year to work out how much income tax you owe.
What about mortgage interest tax relief?
Landlords can no longer deduct the amount of interest paid on their mortgage borrowing as an expense against their income tax. Instead, you can claim a tax credit based on 20% of your mortgage interest payments.
Capital gains tax
When you sell an additional property or a property investment (or any property that is not your main residence), your proceeds will be subject to capital gains tax. This is simply worked out by calculating the difference between what you originally paid for the property, and what you sold it for – your capital gain. At the moment (as of October 2023), the rate for capital gains tax is 18% if you’re a basic rate taxpayer, or 28% if you’re a higher rate taxpayer. Each person is entitled to an annual exemption, so you only pay CGT above this amount. You must report and pay capital gains tax within 60 days of the sale of your property.
What’s on the horizon for CGT?
The government announced some changes to capital gains tax in the upcoming tax years, related to the annual exemption allowance (AEA), or the amount of your gain that is not taxable:
- The AEA for capital gains tax is £12,300 in the 2022/23 tax year.
- From April 2023, this will reduce to £6,000.
- This will reduce further to £3,000 from April 2024.
A tax that many would rather not think about, inheritance tax must be paid on the estate of someone who has died, and includes property, money and possessions. At the time of writing, the value of anything within your estate above £325,000 is subject to 40% inheritance tax, so if you own a number of property investments, this could lead to a large bill. Many people choose to gift assets and even property to their children or grandchildren ahead of time to minimise the potential inheritance tax bill, and you can learn more about that here.
Owning property through a limited company
In recent years, there has been a huge shift towards landlords and investors purchasing properties through limited company structures. This is largely due to certain tax changes that left some landlords – particularly those in the top income brackets – worse off.
There are a number of tax advantages linked to buying property, or owning a property portfolio, through a limited company. For example, rather than paying income tax, you pay corporation tax, which can be as low as 19% depending on how much you make from your properties. You can also distribute any profits made as dividends to shareholders, which currently comes with a tax-free allowance of £2,000.
Furthermore, the Section 24 tax change linked to claiming mortgage interest relief (mentioned above) does not apply to limited companies. Instead, the full amount of mortgage interest can be taken into account as an expense when calculating your profits, meaning you can pay a much smaller bill. There are also potential inheritance tax benefits.
There are downsides to be aware of, though. For example, mortgage rates for properties owned by limited companies are often higher, and there can be extra running costs such as paying for an accountant. Basic rate taxpayers may also not reap the same tax benefits. Therefore, it is advisable to seek expert advice to see whether you will be better off building a property portfolio through a limited company or as an individual.
To conclude, a good tax adviser can point you in the right direction when it comes to maximising your profits from your property, but it is certainly worth knowing the basics and staying up-to-date with any changes. Meanwhile, investing in property in a stellar location with the highest potential to make long-term gains from your investments should stand you in good stead to offset your tax bill.