How to invest in property and reduce tax

How to invest in property and reduce tax

Property investment structures to hold UK property

Whether you live in the UK or are a non-resident property investor, you’ll need to understand what taxes you will have to pay. Investment guides are plentiful on the subject, but many use jargon and legal speak that means little to non-accountants.

In this article, I’ll outline the taxes that are payable on property investment in the UK. We’ll also examine the most common investment structures you can use to invest in property UK and the advantages and disadvantages of each.

Property investment taxes

There is a range of taxes that you’ll be liable to when you make a property investment in the UK. Tax authorities everywhere certainly like their pound of flesh! In the last few years, the UK government has done some of tax changes that directly affect investors in property UK. Unsurprisingly, these changes mean that taxes on property investment are on the increase.

If you’re like me and the majority of other property investors, you’ll hate tax with a passion. You’ll do anything (legal) to avoid paying tax. To make this ambition a reality, the starting point is to understand what taxes you’re liable to pay.

Income tax

When you invest in property on a buy-to-let basis, you’ll be subject to income tax on the rental income. How much tax you pay depends on a number of factors, including how much income you have from other sources, and the amount of net rental income you receive.

It’s up to you to make the correct tax declaration. You do this by submitting an annual self-assessment, and HMRC then calculates your tax liability. Fortunately, you won’t have to pay tax on your entire rental income. The good news on property tax is that there is a number tax reducing deductibles you can claim (I’ve detailed these in an investment news property investment blog). These deductibles include:

  • Mortgage fees
  • Solicitor’s fees
  • Property management fees and charges
  • Insurances (including landlords insurance)
  • Maintenance and repairs

You’ll also be able to claim against your mortgage interest payments, though the benefit of this is being reduced from April 2017. If you’re a higher rate taxpayer, by 2021 you could be paying more in tax on rental income because of how mortgage interest tax relief is changing.

You may also be able to claim other costs against your gross rental income, such as ground rent, travel between properties (made for business purposes), service charges and accountant’s bills.

As you can see, there are plenty of costs associated with property investment. Offsetting as many of these as possible against your rental income will reduce your tax bill.

Capital gains tax

When you buy and sell investment property, you’ll have to pay tax on the profit you make. The taxable amount is calculated after allowing for your personal capital gains tax allowance (in 2015/16 and 2016/17, this is £11,100). The rate at which you pay depends on your tax position – if you’re a basic rate taxpayer, you’ll be charged capital gains tax at 18%; if you’re a higher rate taxpayer, the tax charge will be 28%.

Non-resident investors are charged capital gains tax on investment property disposals in the same way as residents. However, there are different rules for non-domiciled investors (if you’re a non-dom, you should take separate, specialised advice from your accountant).

One way to reduce capital gains tax on the profit you make is to share the investment with your spouse. By doing this, you’ll double the capital gains tax allowance you can use to offset against capital gains tax, and save yourself up to £3,108 in tax (28% x £11,100).

There are different rules when a company sells property – different allowances are used.

Inheritance tax

Even when you die, the taxman will be waiting in the wings with his hand out.

In the UK, inheritance tax (IHT) is charged at 40% on your estate (everything you leave when you die). However, you have a personal IHT threshold of £325,000 – if your estate is valued under this level, there is no IHT to pay. There are also special rules that govern any estate left to your spouse.

You can’t avoid IHT, but you can plan for it. For example, you could hold your investment property in a trust. Different types of trust can be used, including trusts that allow you to benefit from the income and your beneficiaries to take advantage of the capital gain.

However, the easiest way to plan for IHT on a property investment that is held as a personal investment is to buy life insurance. By structuring a life insurance policy in the right way, it will pay out its benefits tax-free. An insurance policy (with a benefit amount that covers the IHT charge) will allow your beneficiaries to pay the IHT and keep the investment property you intended to leave them.

Stamp duty

When you buy a property in the UK, you’ll be required to pay stamp duty land tax (SDLT, or commonly known as ‘stamp duty’). Investment property typically falls under the rules that govern additional properties. This means there is an additional 3% stamp duty to pay on top of residential rates:

Property Price Band SDLT Rates First Property SDLT Rate including Additional Rate
£0 to £125,000 0% 3%
£125,000 to £250,000 2% 5%
£250,000 to £925,000 5% 8%
£925,000 to £1.5million 10% 13%
More than £1.5million 12% 15%

 

There is an exemption for properties valued at less than £40,000. However, UK companies, partnerships, and collective investment schemes will be subject to a stamp duty rate of 15% on all properties valued over £500,000.

Investment structures for property UK

To take advantage of the best places to invest in property UK, most people invest personally. And for the majority of investors, this will be the best way to buy UK investment property. However, depending on your tax position, investment objectives, and the flexibility you need for your investment, you may want to use a different structure for investment.

The following table outlines the five most common investment structures for holding UK property investments (excluding holding under your personal name):

Investment Structure.jpg

Don’t let property taxes cloud your objectives

There’s no doubt that the tax you’ll need to pay on property investment affects the returns you can achieve. But when you’re researching property investment opportunities, my advice is to concentrate on finding the best places to invest in property UK. Make sure that you invest profitably and with your long-term objectives in mind.

While you’ll want to pay as little tax as possible, remember that if you’re paying tax, it’s a sign that your property investment is profitable.

In the next part of this property investment blog series, I’ll look at why you should beware of older properties. In the meantime, feel free to contact one of the teams on +44 (0)207 923 6100, who will be glad to answer any queries you may have.

Live with passion

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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