Taxes and Property Investment: What Buy-to-Let Investors Need to Know
What Benjamin Franklin wrote in 1789 still proves to be true and probably always will “…in this world nothing can be said to be certain, except death and taxes.”
This being the case, and with many different types of taxes that buy-to-let property investors face, it is important to be aware of the various taxes and any implications they may hold in connection to a purchase you are considering.
Your accountant or financial advisor is the best point of contact to ascertain your personal tax circumstances and to make you are aware of the taxes that come with a particular property investment and how much these taxes will be. Although they are a consideration as part of a property purchase, the comparison to UK interest rates on savings and how extremely low they still are, showcases that buy-to-let property investment is still a crucial part of most investors strategy for 2019. Buy-to-let property investments in major Northern cities like Manchester, Liverpool, Leeds, Birmingham and Sheffield will continue to see a high returns, despite tax increases.
Capital Gains Tax
Where property investment is concerned, there is capital gains tax. It is added onto the profit when an investor sells an asset that has increased in value. This ‘capital gain’ has to be declared earlier than other investment types such as shares and it could be taxed at a higher rate.
Although Capital Gains Tax applies to investors, many people can benefit from Private Residence Relief on profits if they are selling their residence, and subject to if they have rented the house out previously or not. As a property investor though, Private Residence Relief is not an option.
If choosing to invest as an individual it is worth noting an annual Capital Gains Tax allowance of £11,300. Also that this is allowance would apply to a spouse if the investor is married totaling £22,600. This exemption allowance sadly does not apply if choosing to invest via a Limited Company.
If a property investor has a personal pension this could decrease capital gains tax up to the cap of £40,000.
Mortgage Interest Tax Relief
Since April 2017 a new rule came into effect to prevent private landlords in the higher rate of tax from offsetting their mortgage interest against their annual rental income. Some landlords are increasing rent to cover the deficit in profit that can result from this change but a financial advisor or accountant will best placed to assist each property investor subject to their own situation and property portfolio.
Another change coming into effect in April 2020 is tax relief on finance costs. These will be restricted in future to the basic rate of income tax. It was previously free for buy-to-let investors to cancel out mortgage interest from their rental costs but in future it will be 20% that is restricted to the basic rate of income tax.
Stamp Duty Tax
This is to be considered carefully when purchasing a buy-to-let property.
For properties valued from;
£125,000 and £250,000 – a 5% stamp duty tax applies
£250,000 and £925,000 – an 8% stamp duty tax applies
£925,000 and £1,500,000 – a 10% stamp duty tax on the portion of the sale over £925,000.01 and 12% on any remaining amount that is over the £1,500,000 threshold.
Law states Stamp Duty Tax must be paid within 30 days and it’s important to factor this in when investing. Another point to note is that additional properties (other than your home of residence) also attract an additional Stamp Duty Land Tax (SDLT) cost of 3% that is on top of the normal rates that apply. There are a few exceptions to this and more information is available at https://www.gov.uk/stamp-duty-land-tax/residential-property-rates
Any and all taxes a property investor attracts when buying a property is important to identify and also ahead of committing to a property purchase. A Financial Advisor or Tax Accountant will be best placed to discuss individual circumstances and the Capital Gains Tax Allowances and Mortgage Interest Tax Relief factors for each investor. When looking at other investments and asset classes, UK Buy-to-Let Property Investments offer high returns, long-term capital appreciation and stability in an investment portfolio that many other investments cannot offer. Speak to our team today to explore the property investment opportunities we have available.