Maximising Returns and Minimising Liabilities: A Guide to UK Property Taxes for Investors
Investing in UK property is popular with everyone from global investors to private individuals looking to build long term value as an alternative or in conjunction with a wider investment strategy of pension and investments.
It can be a lucrative venture but it's more important than ever to understand the tax implications before taking the plunge. The UK has a complex system of taxes and many specifically targeted at the property sector that investors need to be aware of. This article focuses on the taxes payable by UK based investors – foreign individuals and companies looking to acquire UK property have a myriad of additional tax considerations and indeed additional taxes that often apply uniquely to them.
Stamp Duty Land Tax (SDLT) is a tax on the purchase of residential and commercial property and the amount payable varies depending on the price being paid, the identity of the purchaser and the type of property being acquired. Rates vary from zero to 15% and what at one time was a relatively small transaction tax has become an integral part of the thinking and planning undertaken by investors.
Capital Gains Tax (CGT) is a tax on the profit made from the sale of property investment. The amount of CGT payable depends on the amount of profit made and the investor's income tax bracket. For residential property, the CGT rate is 28% for higher-rate taxpayers and 18% for basic-rate taxpayers. For commercial property, the rates are 20% and 10%, respectively.
In addition to SDLT and CGT, investors may also be liable for income tax on rental income. This is a tax on the rental income received from a property and the amount payable depends on the investor's income tax bracket. Basic-rate taxpayers are charged 20% on rental income while higher-rate taxpayers are charged 40% or even 45%.
However, due mainly to the income tax changes introduced in 2017 for individuals investing in UK property – specifically the restrictions on tax relief for mortgage interest that I have written about extensively in the past – many UK investors are increasingly making their purchases through limited companies. This means that income and capital gains are taxed within the corporation tax regime. This adds a number of very significant additional complexities, particularly for the larger-scale investor. For most (though not all) smaller investors it usually means a much lower tax on income.
Those private investors that continue to do as individuals have seen very sharp increases in the tax rate on their rental income. One recent real life example I saw resulted on a person facing an effective income tax rate of 175% on rental income!
Finally, investors should also be aware of Inheritance Tax (IHT), which is a tax on the transfer of assets after death. The IHT threshold is currently £325,000, and any assets above this amount are subject to a 40% tax. However, there are various exemptions and reliefs that can be applied to reduce the IHT liability.
Commercial property investors also regularly have to consider a wide range of complex Value Added Tax (VAT) issues. These can fundamentally change the nature and returns associated with a commercial investment and must be considered.