Property is a complex area of taxation, which requires good planning.
The taxation treatment differs depending on whether the business is incorporated or unincorporated, whether you already own existing properties, whether you are UK resident or non UK resident, whether the property is residential or commercial… the list goes on.
So, here are the highlights… Owning property personally
Income Tax
As an individual owning rental property you can expect to pay income tax on profits arising in the tax year under the self assessment regime. Where profits will broadly be rental incomes received less any revenue expenses incurred in the period.
Note that costs incurred on capital improvement of the property are not deductible against rents. They will be deducted off sales proceeds to work out your gain when you sell the property. This distinction between revenue and capital is important and is a common taxpayer mistake when calculating their own taxes.
Note also that since the introduction of Section 24 mortgage interest relief in April 2017 (we know… section numbers are boring…. so we’ll just explain it) the interest payable on mortgages on investment properties held by individuals is no longer tax deductible. Instead you calculate the tax due on profits ignoring mortgage interest, then claim a basic rate (20%) tax credit against the profit.
Profits from property businesses are taxed after employment income, self employment income and pension income, so the rate of tax payable will be 20%, 40% or 45% depending on which band the profits fall in.
(Rules differ for non UK resident landlords. Under the non resident landlords scheme letting agents or tenants are required to deduct tax off rental incomes at the basic rate (20%) before paying them over to the landlord, unless the landlord successfully applies for gross treatment by completing form NRL1i).
Capital Gains Tax
Capital Gains Tax is payable on any gains arising on the sale or transfer of property that has not been your main residence through the entire period of ownership.
Gains are calculated as sales proceeds (or market value if the transfer is a gift) less original purchase price, less the cost of capital improvements (for example and extension / loft conversion).
Tax on gains made on residential properties are taxed at 18% or 24% depending on the taxpayers other taxable income in the year.
There are also very strict reporting requirements that means a return must be submitted and any taxation due paid to HMRC within 60 days of completion, see Capital Gains Tax on Disposal of Residential Property return for more information.
Stamp Duty Land Tax
Residential Stamp Duty Land Tax (“SDLT”) is chargeable on the value of the property at the rates shown in figure 1, if the buyer does not currently own any other properties personally, but is not a first time buyer.
If the purchase results in the buyer owning more than one property, and the property is valued at more than £40,000, an additional 3% SDLT is payable on each band. If the buyer is non UK resident, a further 2% SDLT is payable on each band.
Figure 1
For first time buyers the applicable rates are as shown in figure 2 (note this relief is only available if the total value of the property does not exceed £625k – if it does exceed £625k, the above rules apply).
Figure 2
