Property tax advice is vital for landlords, whether buying or selling investment or development properties.
Several property tax payments need considering – including stamp duty land tax, income tax, capital gains tax, inheritance tax and annual tax on expensive homes owned by companies are the main ones.
Investors and developers also pay different taxes – so it’s important to make the distinction whether the property is for rental or selling on at the onset of purchase.
Property investors should always take professional tax advice before entering in to a purchase.
Here’s a quick look at some of the property tax issues for landlords:
Stamp Duty Land Tax
This tax is paid when on a property purchase. The amount is calculated as a percentage of the purchase price.
A sliding scale determines the amount to pay – from 0% for properties costing under £125,000 to 7% for those of £2,000,000 or more.
Annual Tax on Enveloped Dwellings
This is a yearly charge on homes owned by offshore companies and only applies to homes valued at more than £2 million. The tax is not paid on homes commercially rented to tenants or some held for development.
Value Added Tax (VAT)
VAT is not charged on rents to residential tenants, meaning that landlords cannot recover any of the associated VAT costs.
But for work carried out on UK properties the zero and reduced rates can be considered to reduce refurbishment costs.
For UK residents who personally own a UK rental property, income tax is paid on net rental. Net rent is the rent paid less allowable expenses, such as insurance, repairs and mortgage interest.
The proceeds from the sale of a development property are also subject to Income Tax.
For non-UK residents with UK rental properties, income tax is also paid under the non-resident landlord scheme (NRLS).
Capital Gains Tax
For UK residents the sale or gifting of a property usually triggers CGT on the gain at 18% for basic rate tax payers and 28% for higher rate taxpayers.
This also applies to investment properties and second homes, but for some holiday homes the CGT can be lower as some reliefs may apply.
Gains on the sale of a main home are generally exempt from CGT.
Non-UK residents with UK properties do not face CGT on the sale or gift of a property. But gains on residential property valued at more than £2 million by non-UK firms where the property was occupied by the family will be taxed at 28%.
Properties are usually subject to Inheritance Tax at 40% on estates over the nil rate band. Several reliefs and exemptions apply. Gifts between spouses and civil partners are usually exempt.
For non-UK residents Inheritance Tax is avoided by owning the property througha an offshore company, providing the home is not occupied by the owners.