If you’ve dipped a toe into the property investment or buy-to-let markets, you’ll be aware that there are a number of tax and financial planning elements to take into account when you’re looking at the profits you can make from your property portfolio.
If you haven’t set up a limited company as an umbrella for your properties’ financial affairs, any personal income you make from your portfolio will be subject to income tax (at rates that can be as high as 45%) – and that’s something you need to work into your financial planning if you’re going to minimise the profits you lose to tax.
So, to help you make the best possible return on your investment, here are our top ten tips for managing your tax costs and property income.
- Domestic Items Relief
If you’re renting out your properties as furnished lets, you may have been making use of the old ‘Wear and Tear Allowance’.
This allowance for wear and tear on furniture and fittings for furnished properties has now been removed, as of the 2016 tax year and has been replaced with the ‘Replacement of Domestic Items Relief’. The new scheme has a wider scope and will cover replacement of things like household appliances and kitchenware – allowing you to claw back more of your domestic outlay on these lets.
- Higher-rate relief on mortgage interest
From the 2017/18 tax year, if you’re a buy-to-let landlord then you’ll no longer be able to receive higher rate relief on your mortgage interest or other finance costs. If you’ve been making use of this relief, this is going to bump up your tax costs.
The removal of the higher-rate relief could be a spur for you to move your business into a limited company structure as a more tax-efficient option – something we’ll cover in more detail in our next blog post.
- Tax on disposal of a property: UK private resident
If you live in the UK and sell a property, the money you make from that sale will be subject to capital gains tax (CGT) at a rate of either 18% or 28% – after you’ve deducted any available annual exemption you’re entitled to.
Some things to note re: your CGT liability include:
- The lower rates of CGT (10% or 20%) introduced from April 2016 don’t apply to the disposal of residential property.
- Your CGT is payable by 31st January following the end of the tax year of disposal. It’s worth knowing that there are proposals to introduce a 30-day from completion payment deadline from 2019/20; something you’d need to work carefully into your annual tax planning once this takes effect.
- CGT holdover relief may apply if you’re disposing of the property to your own company or to a trust.
- Private Residence Relief (PRR) and letting relief are available if the property being sold has ever been your only or main residence – if that’s the case, make use of the reliefs and minimise the CGT you’re hit with.
- Tax on disposal of the property: non-UK resident
If you’re a non-UK resident, you may have assumed that you won’t be eligible to pay CGT. But as of 5 April 2015, non-UK residents are subject to CGT when disposing of an interest in a UK residential property.
Some important points to factor into your tax planning will include:
- Only gains you’ve made since the 5 April 2015 date are taxable.
- Your gains will be taxed at 18% or 28%: the lower rates introduced from April 2016 don’t apply.
- You must report all transactions to HM Revenue & Customs (HMRC) and a payment on account has to be made within 30 days. There are exceptions to the 30-day rule if there’s no gain or loss, or if your tax affairs already fall within self-assessment.
- From April 2013, any gains you’ve made from property that’s subject to the Annual Tax on Enveloped Dwellings (ATED regime) will be subject to ATED capital gains tax, which is charged at 28%.
- Non-resident companies are subject to CGT under two regimes: where this is the case, ATED gains take precedence.
- Owning a property with other people
If you’re looking to expand your property ownership, you might be considering pooling resources with other people and buying a house through joint ownership. If you do follow this path, it’s important to bear in mind that the maximum number of legal owners of land and property is currently restricted to five people.
And when there are multiple owners, there are other implications to be aware of:
- You could be hit by CGT when you dispose of part interests to other people.
- Any disposals you make are made at the market value, regardless of whether any consideration has been received.
- CGT holdover relief may be available, and is well worth investigating.
- As the owners of the property, you and your business partners will need to decide whether to hold property as joint tenants, or tenants in common – and will also need to think about the effect on joint tenants of changing beneficial interests in the property.
- Losses from property income
If you make a loss from your property income, there’s no sideways loss relief for this loss. When you find yourself in a loss-making position, you have two main options:
- You can offset your losses against other property income
- Or your losses can be carried forward to the next financial year.
- Stamp Duty Land Tax (SDLT)
You’ll be charged stamp duty when you purchase a new property. For residential property, the rate you’ll pay at will be between 0%-5%, and for second homes and rental property this drops to between 3%-8%.
From April 2016, a 3% premium applies on the purchase of an additional residential property (including any buy-to-let properties or second homes you purchase).
- Land and Building Transaction Tax (LBTT)
From 1 April 2015, if you’re looking to buy a property in Scotland, that purchase will be subject to Land and Building Transaction Tax (LBTT) instead of SDLT.
A 3% additional dwelling supplement is charged on the purchase of additional residential property (again, including any buy-to-let properties or second homes).
- Inheritance Tax (IHT)
If you become the owner of property as the beneficiaries of an estate, you’ll receive the property at the market value. As such, there would be no capital gains tax for you to pay on an immediate sale – saving you a substantial tax cost on this sale and bumping up the profit you’ll make from the sale.
- VAT on property income
Value-Added Tax (VAT) isn’t something you’ll usually have to deal with as an individual property owner. The general rule for private individuals is that letting property is exempt from VAT.
- Residential lets are always exempt, but commercial letting can be standard rated if you’ve opted to be registered for VAT.
- If your property qualifies as a furnished holiday let, then the income generated is standard rated and you’ll have charged VAT to your tenants, if you’re registered for VAT purposes.
- Becoming VAT registered means adding an additional 20% to your invoice price and then collecting this tax and paying it to HMRC on a quarterly basis. It can be a complex and time-consuming administration task, so it’s worth talking to your accountant to understand the full implications of becoming VAT registered.
Talk to us about your property tax planning
Whether you’re just starting out with your first property investment, or have a large portfolio of buy-to-let houses, there’s always value to talking to a professional adviser and making sure your property tax planning is as far-reaching as possible.
At Square Mile, we’ll help you understand the taxes you’re liable for, the benefits and planning options you can make use of and the key ways to maximise your income from your portfolio.
One key way to improve your profitability is to incorporate your property business as a limited company – something we’ll cover in our next blog post.
If you’re looking to maximise your property income, come and talk to us.
Get in touch to arrange a chat with our tax team.