Investing in property can be a great way to further your financial position and provide for your family. But being a landlord comes with a host of tax responsibilities, which can be tricky to get to grips with.
Here we’ll go over the main tax obligations property investors face, while offering practical advice on how to reduce your tax burden.
Income tax or corporation tax?
Property investors either pay income tax or corporation tax on their profits. Which one they pay depends on how they manage their property.
Investors who hold their property in their own name are technically sole traders (as your investment is essentially a business). As a result, they pay income tax which begins at 20%, rising to 40% and 45% on higher portions of income.
On the other hand, investors who manage their property through a limited company pay corporation tax. This is charged at 19% on profits up to £50,000 and 25% on profits above £250,000. Profits between these two figures are also taxed at 25%, but marginal relief can be applied to reduce the effective tax rate
How should you manage your property: in your own name or through a company? While companies come with some extra administrative work, it does offer a much more lucrative tax rate. Meanwhile, they give you limited liability, which means you are only personally liable for debts up to the money you personally invested.
However, if you open a company, you should be aware of the impact that has on your capital gains tax obligations, which we’ll turn to now.
Capital gains tax
Capital gains tax is the tax payable on the profit made when an asset is sold or otherwise “disposed of”. It is charged at 18% or 28% for residential properties, the rate depending on your tax band for income tax when taking the gain into account. Every individual has a tax-free allowance of £3,000, reducing the tax due.
But what about companies? They don’t pay capital gains tax on assets; instead, they pay corporation tax. As such, they do not have a capital gains tax allowance but usually benefit from a lower tax rate when selling property.
Critically, when an individual sets up a company and transfers the property over to it, that may incur a capital gains tax charge as this counts as a disposal. So, if you’ve just started your portfolio and think you will set up a company in the future, you may want to think about this early on. If your portfolio is large, you need to plan for the possibility of a charge so it doesn’t harm your investment opportunities.
Stamp duty land tax
While capital gains tax concerns the disposal of property, stamp duty land tax (SDLT) is about the purchase of property. The rate depends on the value of your property.
Property or lease premium or transfer value SDLT
Up to £250,000 Zero
The next £675,000 (the portion from £250,001 to £925,000) 5%
The next £575,000 (the portion from £925,001 to £1.5m) 10%
The remaining amount (the portion above £1.5m) 12%
Bear in mind that landlords must pay a 3% surcharge on top of the rates presented above. You should also note that SDLT is devolved in Wales and Scotland as the land transaction tax, and the land and building transaction tax respectively.
Allowable and capital expenses
Claiming and offsetting expenses against your rental income to reduce your pretax profit is important to reduce your tax liability and save money that you could invest elsewhere.
Allowable expenses are costs related to the day-to-day running of your business, such as repair and maintenance costs, common bills, insurance, services (such as cleaners), and replacement furnishings.
Capital expenses are costs that increase the value of your property. That includes improved furnishings, extensions and upgrades to electrical, plumbing and heating systems.
Need help with your taxes?
Navigating taxes as a property investor can be a tough task, but our team of tax professionals is here to help. We’ll help you report and pay your taxes to ensure you’re on the right side of the law while ensuring you’re claiming every expense and allowance you can that will reduce your tax bill.
Talk to us about your taxes today.