Tax factors to consider when investing in property
In spite of the uncertainties surrounding Brexit and the current economic situation, buying an investment property is still an attractive proposition for shrewd landlords who are prepared to seek long-term returns and look beyond short-term fluctuations in house prices.
There's a shortfall in the number of homes for our rising population and this isn't going to be addressed in the near future. Investors who are in a position to buy to let are highly likely to be able to generate a reasonable return; there's also a shift, particularly in the younger age groups, towards renting as they save longer to get a foot on the property ladder.
If you are considering investing in property in the UK in the near future, it's important that you thoroughly research the financial implications first, particularly with regard to the amount of tax you will be required to pay. We've listed five of the main taxes you need to be aware of below:
1. Stamp Duty Land Tax (SDLT)
SDLT is payable when you buy a property or land, and is usually payable to HMRC within 30 days of the purchase. There are banded percentage rates depending on the price of the property, ranging from zero for those under £125,000 to 12% for those over £1.5 million. However, if you're purchasing a second property in England, whilst the tiered tax rate still applies, there is an additional 3% surcharge which applies to the entire purchase price of the property.
2. Capital Gains
Capital Gains Tax is a tax on the profit you make when you sell something which has increased in value since it came into your possession. There is a tax free annual exemption each year, much like the personal allowance for income, and the Capital Gains Tax allowance for the tax year 2019/2020 rose from £11,700 to £12,000. Capital gains on the disposal of residential properties are taxed at the rates of 18% and 28%, depending on whether the gain falls within the basic rate or higher rate tax bands.
3. Income Tax
The income you receive from renting out your property is taxable and needs to be declared on your Self Assessment Tax Return. This is charged in accordance with your income tax banding, although allowable expenses can be offset against the rental income, such as property repairs and maintenance, council tax, agency fees and building insurance premiums. Tax relief is also available on mortgage interest costs, on loans used to purchase investment properties, but this is being restricted to basic rate tax relief and is not relieved in the same way as other allowable expenses.
4. Inheritance Tax
A buy to let property will form part of your estate and as such will be liable for Inheritance Tax, but the amount can vary. If you are a sole landlord who owns the property in its entirety, then IHT is payable if the value of your estate, including the investment property, exceeds £325,000 after deducting any outstanding mortgage. If you own the property as a married couple or as civil partners, the threshold on your combined estate is effectively doubled to £650,000. The total value of your estate above this threshold is taxed at 40%.
5. Annual Tax on Enveloped Dwellings
This is an annual tax charge payable mainly by companies which own UK residential property valued at over £500,000. Initially introduced in 2013 for properties valued over £2 million, the value at which ATED applies has been reduced over subsequent years so that considerably more properties fall under its aegis. Entities which may be liable for this tax include companies with a beneficial interest in the property, partnerships where one or more partners is a company, and Collective Investment schemes. There are various reliefs against the ATED charge, such as when the property is rented out, but even if the property is exempt from the tax charge, an ATED return must be submitted each year.
Property taxation is a very complex area and landlords will benefit from professional guidance on mitigating income tax, capital gains liabilities, asset protection and other essential issues. Here at Perrys, our experienced property accountants offer expert advice to help manage property portfolios efficiently. Find out more about our property work here or get in touch to see how we can help maximise the return on your property investment.