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When you invest in property UK, one thing you can be certain of is that the taxman will want a cut. There are some strategies that can be used to reduce the effects of UK property tax changes when making a buy-to-let investment. If you are buying to flip the property (sell shortly after the purchase for a capital gain), your tax saving options are more limited.
In this article, you’ll discover the taxes you pay when you invest in property UK, and when you sell your investment property.
Who pays UK property tax on an investment property?
If you invest in property directly, in your name or partnership with someone (such as your spouse), you’ll be liable to tax. There are different rules when investing as a limited company. What this article discusses is a direct investment as an individual – and this includes when investing in joint names with your spouse.
What taxes will you pay?
There are two taxes that the HMRC will levy upon you when buying and selling an investment property in the UK. The first is Stamp Duty Land Tax (in Scotland there is a different tax, called the Land and Buildings Transaction Tax), which is payable when you buy a property. The second is Capital Gains Tax (CGT), which is payable when you sell an investment property in the UK.
How much Stamp Duty Land Tax (SDLT) will you pay when you buy an investment property?
When you buy an investment property in the UK (a property other than your main residence) you will be liable to pay SDLT. The amount you pay depends upon the value of the property. If you purchase a property that costs £40,000 or less, you will pay no SDLT. Above this purchase price, you’ll pay the residential SDLT plus 3% on the whole price you paid for the investment property.
The rates are shown in the following table:
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|Property Price/Value||Standard SDLT Rate||Investment Property SDLT Rate|
|Up to £125,000||0%||3% (0% below £40,000)|
|Between £125,000 and £250,000||2%||5%|
|Between £250,000 and £925,000||5%||8%|
|Between £925,000 and £1.5 million||10%||13%|
|Above £1.5 million||12%||15%|
If you pay £275,000 for a residential investment property, the SDLT is calculated as follows:
3% on the first £125,000
|5% on the next £125,000||£6,250|
|8% on the next £275,000||£2,000|
It must be paid within 30 days of the day on which you are entitled to take possession of the property. Employ a good solicitor to ensure you don’t miss this deadline.
HMRC has an easy-to-use SDLT online calculator – you can access it by clicking here.
How much CGT will you pay when you sell an investment property?
Every person who sells an investment property in the UK will be liable to CGT. There was a loophole that exempted overseas investors and expat investors from CGT liability, but this has now been closed. The amount you will be taxed depends on five factors:
- The purchase price
- Costs incurred
- The sale price (or market value)
- Your other income
- Your unused personal CGT allowance
In most cases, the sale price will be used to calculate your capital gain. However, if you gift your property or sell way below a fair market price, you may have to calculate using the market value (you’ll need to seek personal tax advice on this point).
You should deduct certain costs from your gain before calculating the tax due. These include:
- Estate agent fees
- Solicitor’s fees
- Improvement costs
Calculating your CGT liability
When calculating your CGT liability, all gains or losses during the tax year are added together (though non-residents only pay CGT on residential property gains). For the sake of the following example, we’ll assume that the investment property is the only asset sold during the year:
For higher rate taxpayers, the CGT rate is 28%.
For basic rate taxpayers, the CGT liability is calculated as follows:
|Calculate the taxable income you have (income – personal allowance – income tax relief available)||£0|
|Calculate your taxable gain||£50,000|
|Add to your total taxable income||£50,000|
|Deduct CGT allowance||£11,300|
|Total capital gains||£38,700|
|If this is within the basic rate income tax band, you pay 18% CGT on residential property||£6,030||Basic rate tax band 2017/18 is £33,500|
|Above the basic rate band, you pay 28% CGT on residential property||£1,456|
|Total CGT to pay||£7,486|
There’s a very good online CGT calculator here.
The total taxes that you will pay on the above buy-and-sell property investment, should both legs of the investment be made this year, would be £19,486. It would leave a net profit of £30,514.
Tax is complex – you’ll need help!
Successive governments have promised simplification of the tax system in the UK. As you can see, it’s still an extremely complex area. The only way to ensure you don’t overpay property taxes in the UK is to enlist the help of a UK accountant.
Contact one of our team on +44 (0)207 923 6100, and we’ll be pleased to give what advice we can, including updating you on the best property investment opportunities in the UK today. Alternatively, you could download our free book, “The Non-Accountant’s Guide to UK Property Tax”.
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