Letting a property out can be a great investment and provide an extra income. However, with stamp duty land tax, income tax, capital gains tax and inheritance tax all potential liabilities, it can also be complicated and confusing. So, from investors that have a portfolio of properties to those with just one, tax really does need to be on any investor’s radar!
We can help minimise your tax liabilities now and in the future, protecting your assets and the capital that you have worked hard for. In particular, we can advise and assist on the following:
- Removing or mitigating the inheritance tax exposure on rental properties;
- Using rental properties to reduce the burden of paying for your children’s education;
- If you are letting former residences, how best to plan matters to ensure your principal private residence status is maximised;
- For overseas landlords, we offer advice on departing from and returning to the UK, and will assist in obtaining approval from HM Revenue & Customs for rental income to be paid without the deduction of basic rate tax.
The general tax considerations are set out below.
Stamp Duty Land Tax (SDLT)
When you buy a property, you will need to pay stamp duty, which is calculated as a percentage of the property’s value and totally unavoidable!
Current rates are:
- Properties worth less than £125,000 are exempt.
- Properties worth between £125,001 and £250,000 are taxed at 1%.
- Properties worth between £250,001 and £500,000 are taxed at 3%.
- Properties worth between £500,001 and £1m are taxed at 4%.
- Properties worth between more than £1m and £2m are taxed at 5%.
- Properties worth more than £2m are taxed at 7%.
- Properties worth more than £500,000 bought by corporate bodies after 20 March 2014 are taxed at 15% (£2m pre 20 March 2014, with transitional rules applying).
Income Tax (IT)
IT is paid on your rental income minus any expenses that relate to the running of the property such as mortgage interest, insurance, some legal fees (so long as they are not capital in nature), management fees, general maintenance and repairs, utility bills etc.
To report these to HMRC, the owner/s of the property need to do a self-assessment tax return. IT will be charged at a rate appropriate to your TOTAL income; for example, if you have an employment, a rental property and savings in a bank account, the total of all that taxable income will determine the rate at which you pay IT.
If you are not UK resident, the letting agent managing your UK property will retain tax at 20% from rental income before passing it over to you each month. The non-resident landlord scheme allows you to receive the full amount of the income and then prepare a self-assessment tax return instead.
Capital Gains Tax (CGT)
CGT is paid on the gain you make when you sell your property. This is based on how much you sold the property for less the amount you bought the property for in the first place, less any associated costs or enhancement expenditure, less any reliefs.
There is a tax-free allowance of £11,000 for 2014/15 per person per year (£5,500 for most trusts) and then gains are taxed at 18% for basic rate taxpayers and 28% for higher rate payers.
There are certain reliefs available such as Principal Private Residence Relief and Lettings Relief, but there are some complex rules around them and when you have many properties, they may not be available at all.
In certain circumstances, where your business is property development and you are doing properties up with an intention to increase the value and sell them on, HMRC may well say this is a trade and so tax any gains to IT rather than CGT, which means you will be charged to tax at 20%, 40% and 45% depending on your income levels!
You can also run into problems if you buy a property for a relative to live in, rent out part of your property or if you sell a property to a connected person. With effective planning and ensuring the circumstances are compliant, we can ensure your investment is set up in the most tax efficient way. There are also special rules in place for certain scenarios such as someone who owns and rents out a property whilst living in job-related accommodation.
Inheritance Tax (IHT)
IHT is charged on death when a property is passed to another person, either via the will or within seven years of death; it is also potentially payable if transferred into trust. The rules are very complicated but there is lots of planning available which can help reduce the amount of value in your estate.
The IHT threshold is £325,000 per person so if someone owns even one buy-to-let property and their own property, this can quickly be eaten up.
Advice should ideally be sought when considering purchasing a buy-to-let property so it is set up the most tax efficiently from the outset. This avoids costly tax implications, further tax planning and increased tax compliance costs later down the line and also makes the tax situation a lot less confusing hence meaning you are less likely to miss a deadline and have a penalty imposed. However, there is planning that can be carried out after a property has been acquired in order to remove it from an IHT exposure.
Residency and property
New rules have been introduced so that owning a UK residential property and being non-resident means you will get taxed to CGT when the asset is sold. This change means that many people who thought they were outside the scope of CGT will now be brought in.
Various anti avoidance rules have been put in place over the years so that investors cannot get out of paying tax by the use of loopholes and landlords need to ensure they are not captured by one of them. One important anti-avoidance measure in relation to IHT means that any UK property put into an overseas company would get captured by the tax man in the guise of Annual Tax on Enveloped Dwellings (ATED).
Landlords need to ensure they know how they would be taxed in certain situations before putting themselves in the firing line!
Using property for tax planning
If you already have a property or properties, it is never too late to plan. For example, with the use of a trust you can save money by using the property to pay for the school fees or university fees of a grandchild so you or your son/daughter are not paying the amounts out of taxed income i.e. needing to earn £16,667 to pay £10,000 of school fees. This is extremely complicated tax planning that falls within HMRC’s accepted principles.
There are plenty of opportunities to ensure your investments are tax efficient. We work alongside a client’s current accountants to ensure everyone is on the same page and that the client’s best interests are at heart. We can also introduce Independent Financial Advisers to the client if necessary, or if they don’t have a current accountant, recommend one that we work closely with and trust. It is of our opinion that a Chartered Tax Adviser should always be consulted before entering into any planning of this nature so please call us on 01730 893039 for a chat or an initial no obligation meeting.