Property Tax Guide for Dummies

Property tax can be complex and difficult to understand. This guide – a property tax guide for “dummies” – is therefore short, simple and direct. It covers the basics of what every UK property owner or investor should know about property taxes…

Have you ever wanted a quick easy to read guide on the main points about taxation as it affects properties – a guide that even an idiot, in the nicest possible sense, could understand and use?

Yes? Well, your luck is in!

This blog identifies the chief taxes you will come across as a property landlord or investor, and briefly sets out and considers the main points you should know.

It looks at:

1 – Income tax

2 – Section 24 of the Finance (No 2) Act 2015

3 – Stamp duty land tax (SDLT)

4 – Capital gains tax

5 – Inheritance tax

1 – 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.

Income tax will also apply in respect of any non-rental fees or income you make in your property business. For instance:

  • As a property sourcer, you will be liable to income tax on the fees you receive from clients in return for the properties you find them
  • As a provider of service accommodation or holiday lettings, you will be liable to income tax on the sums you receive from guests or occupiers.

You will also be liable for income tax on any subsidiary or ancillary fees or income you receive.

For example, you may provide fee-charging advice and assistance or consultancy services.

Similarly, you may provide property education on a fee-paying basis.

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

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2 – Section 24 of the Finance (No 2) Act 2015

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

That was the case with residential rental property 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 will be paying almost £2,200 more tax a year per £15,000 of rent.

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

Finance costs include 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 and, therefore, many landlords are transferring properties to limited companies and/or making sure they make any new purchase through a corporate vehicle.

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3 – 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

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 but 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

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5 – 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, meaning that you may have 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

An adequate understanding of tax and its management are of extreme importance since the wrong tax moves can easily end up costing you hundreds of thousands of pounds over the course of your business life.

This blog is a basic guide for informational purposes and it is vital that you seek advice from a suitable expert before any step, decision or action which may have tax implications.  It has been written on the basis that you own your properties as an individual, as opposed to a limited comply.  The rules and how they apply to corporations are often very different.

Remember that tax is very much an individual thing. That’s to say, your 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 – informing 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.

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Dalton Barrett
Rebel Property Coach

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