Basic UK Property Taxation

Basic UK property taxation is about the taxes which typically apply to investment property when it is rented, sold or transferred.

If you acquire or own an investment property in the UK, you may be taxed on it in four main ways.

FIRST: INCOME TAX…If you receive rent from your property, you may have to pay income tax.

SECOND: CAPITAL GAINS TAX…If you sell or transfer a property and it has increased in value from the time of purchase, you may have to pay capital gains tax.

THIRD: STAMP DUTY LAND TAX…If you buy a property, depending on its value, you may have to pay stamp duty land tax base on the purchase price.

FOURTH: INHERITANCE TAX…If the value of your estate on death (including your investment properties) exceeds the relevant tax threshold, inheritance tax may be payable on it.

Often the relevant tax threshold will be £375,000. Sometimes it will be £475,000. Sometimes it will be £950,000.

NOTE: for more information on the “tax threshold”, see below under “Inheritance tax”.

This article covers basic UK property taxation under the following headings:

1  What is an investment property?

2  Income tax on rent

3  Allowable deductions from rent

4  Capital gains tax

5  Stamp duty land tax (SDLT)

6  Inheritance Tax.

1  What is an investment property?

Any property you own other than your home is likely to be an investment property. If you get any rent from it, you are potentially liable to pay income tax on the amount you receive.

Whether you pay tax or not, and how much you pay, will depend on your overall tax position – and, in particular, your tax band.

If you sell, transfer or giveaway an investment property, capital gains tax or stamp duty land tax may apply.

When you die, inheritance tax may apply.

2  Income tax on rent

At the heart of basic UK property taxation is income tax.

If you rent out property as a regular buy-to-let landlord or investor, letting on a single let or an HMO basis, you will be liable to income tax on the rent less any allowable deductions or expenses.

Expenses include the costs of letting and managing the property.

Previously, landlords letting furnished residential premises were entitled to a “wear and tear” allowance of up to 10% of the net rent.  However, that allowance was ended from the tax year beginning April 2016.

You have a legal duty to notify HMRC of all your property related income, filing a Self-Assessment Return.

UK-Currency-Money-Pound-GBP-620x4134

3  Allowable deductions from rent

With most forms of income, you are entitled to deduct all your legitimate expenses in providing your service or product, before tax is applied.

That was the case with residential rental income until chancellor George Osborne changed the rules by bringing in Section 24 of the Finance (No 2) Act 2015.

In the case of landlords owning property in their own name, the ability to deduct interest on mortgage payments is being incrementally removed, 25% at a time over 4 years, starting in the tax year 2017-2018.

The effect of the change is that landlords will at the end of the process be taxed on their rental turnover subject to tax relief at the basic rate.

Landlords paying tax at the higher rate could end up paying significantly more tax as a result of the rule change.

The rule change applies specifically to “finance costs”. That is not just mortgage interest. The gov.uk website states:

Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

Section 24 does not apply when the residential property is held through a limited company. For that reason, many landlords are transferring properties to limited companies and/or making sure they make any new purchase through a corporate vehicle.

3E352F6500000578-4308184-The_more_money_you_put_in_a_pension_the_more_you_will_keep_from_-a-12_1489396171829

4  Capital gains tax

You pay capital gains tax (CGT) on the gain in the value of a property when you “dispose” of it – less any allowable deductions.

Deductions include the costs of purchase and capital works carried out to the property after its purchase.

The term “dispose” includes selling, giving away and swapping.

Good to know: Assets given or sold to spouses or civil partners normally do not attract capital gains.

If you make losses on the disposal of one property, you can deduct them from your gains when disposing of another property when calculating the amount chargeable to CGT.

You only pay tax on the increased value or gains which is above your CGT tax-free allowance (also known as the Annual Exempt Amount) – which at the time of writing (October 2019) is £12,000.

Normally you must report any capital gains in your Self-Assessment Return. Any tax due must be paid by the 31st January after the end of the tax year in which the disposal took place.

The payment period will be shortened from 2020. In the case of disposals from the 6th April 2020, CGT due must be paid within 30 days of completion of the disposal.

The amount of tax you pay will depend on whether you are a basic rate taxpayer or higher or additional rate taxpayer.   For higher or additional rate taxpayers, the tax rate is 28% in respect of gains on residential property. However, it is only 20% in respect of other chargeable assets.

Go to the gov.uk website for guidance as to how tax is calculated in respect of basic rate taxpayers

download

5  Stamp duty land tax (SDLT)

Stamp duty land tax or, simply stamp duty, is payable on the purchase of a property, residential, non-residential or mixed-use.

A return must be sent to HMRC and the tax due paid within 14 days to avoid penalties and interest.

The stamp duty rates which typically apply to residential property are as follows:

property table 1

Second-home owners and buy-to-let landlords pay a stamp duty surcharge, which is an extra 3% in each case.

If you buy a new leasehold property, you pay stamp duty at the above rates on the lease premium.

If the total rent over the length of the lease (the “net present value”) is more than £125,000 you also pay stamp duty at 1% on the amount above £125,000.

In the case of non-residential or mixed-use property the stamp duty rates are as follows:

property table 2

If you buy a new non-residential or mixed-use leasehold property, you pay stamp duty on the lease premium and the “net present value”.

These are worked out separately and then added together.

The website gov.uk has a useful calculator for working out stamp duty.

Good to know: stamp duty paid on a purchase is deductible from gains before the calculation of capital gains tax. iStock_000027200424_Medium-copy

6  Inheritance tax

Inheritance tax (IT) is the tax that applies to your estate (property, money, possessions) on your death.

The tax at a rate of 40% normally, applies to your estate above the tax threshold.

The basic threshold is £325,000. If your estate does not exceed that amount, no IT is payable.

If you leave your home to your children or grandchildren, the threshold can increase to £475,000.

It may be possible to add your spouse’s or civil partner’s threshold to your threshold on death. That would give a threshold of up to £950,000 (£475,000 x 2).

If you give all your estate above the £325,000 threshold to your spouse, civil partner, a charity or community amateur sports club, no IT is payable.

A big plus for property owners, business people or investors is the availability of Business Relief for inheritance tax.

The relief, which can be at 50% or 100%, operates to reduce the value of certain assets forming part of your estate.

Relief at 100% is available on:

  • A business or interest in a business
  • Shares in an unlisted company.

Relief at 50% is available on:

  • Property and buildings
  • Unlisted shares
  • Machinery.

Good to know: The relief is available during your life and through your will.

Another way to reduce the tax burden on your estate is to reduce the value of your estate by transferring assets to persons of your choice during your lifetime – such as children and grandchildren.

These are known as “potentially exempt transfers”.

If you survive 7 years after a transfer, no IT will be payable on the amount transferred. If not, the recipients will be liable, on a sliding scale, for the inheritance tax on the estate transferred to them.

Go to the gov.uk website if you to want to learn more about the 7-year rule

Conclusion

Adequate tax understanding and management are of extreme importance. The wrong tax moves can easily end up costing you hundreds of thousands of pounds in your business life.

The account of basic UK property taxation given in this article is a starter guide for informational purposes. It is crucial that you seek advice from a suitable expert prior to any step which may have tax implications.

This article has been written on the basis that you own your properties as an individual – as opposed to a limited company.  The rules and how they apply to a limited company are often very different.

Remember that tax is very much an individual thing. That’s to say, your personal circumstances and tax position may not be the same as others who seem to be in the same position as you.

To get the best service from your tax advisers, ensure that you instruct them fully. Inform them of your unique circumstances and objectives.

Are you aware of any horror stories which have happened as a result of a buy-to-let landlord, investor or entrepreneur making taxation errors or oversights?   Please leave your observations or comments below.

Enjoyed this blog? Please share it with friends by clicking on the LinkedIn, Twitter, Facebook or Instagram icon on this page. 

If you have not signed up to get my latest blogs sent to you weekly, please do so HERE

Dalton Barrett
Rebel Property Coach

Please follow me on Twitter @Dalton1London
You can find me on FacebookInstagram and YouTube
Please link up with me at LinkedIn

My website is: www.rebelpropertycoach.com

 


ADVERTISEMENTS

 

 

Leave a Reply

Your email address will not be published.