There are many different types of taxes that property investors face, therefore it is important to be aware of them to ensure when making decisions that any tax implications are taken into consideration. With recent changes to tax relief on mortgage interest, it is even more important to ensure that your property investments are sound and your tax planning is up to speed.
Taxes are a huge consideration when buying a property investment and it is important to be informed on the taxes involved when buying and selling properties. However, with interest rates on savings remaining incredibly low, property investment is still a great way to see a good return on your money, even with increased taxes. Your accountant or financial advisor should be able to make sure you are aware of the taxes that also come with property investment and will inform you of how much these taxes will be.
Capital gains tax
Firstly, there is capital gains tax. This is type of tax is whereby more tax is added on the profit when you sell an asset that has increased in value. In terms of property investments, capital gains have to be declared earlier than that of assets such as shares, and property can be taxed at a higher level.
Whilst capital gains tax applies to property sales, you can benefit from Private Residence Relief on any profit if you are selling your residence, however this may not be the case if you have previously rented out your home. When selling another property, for example as a property investor, Private Residence Relief is not valid therefore capital gains tax is applicable.
When selling a property you must ensure that profit forecasts for the sale include the deduction of capital gains tax. It’s worth noting that individuals get an annual capital gains tax allowance of £11,300 (this does not apply if you choose to invest in property via a limited company).
If you are a property investor and married, do not forget your spouse is also entitled to an exemption of £11,300. Finally, in order to decrease capital gains tax you can incorporate the use of your personal pension, however there is a cap of £40,0000
Mortgage interest tax relief
Next there is mortgage interest tax relief. There is now a new rule which came into effect in April 2017. This is where private landlords who are in the higher- rate tax bracket are now not allowed to offset their mortgage interest again their rental income. Many landlords are responding to this change by increasing rent in order to make up the deficit in profit. However, this is something to refer to your accountant or financial advisor about.
Furthermore, from 6th April 2020 tax relief for finance costs will be restricted to the basic rate of income tax. Before this it was free for property investors and landlords to be able to eliminate mortgage interest from their rental costs, this happened before working out what the tax liability was going to be. However, now this is not possible therefore it will be 20% that is restricted to the basic rate of income tax.
Stamp duty is a crucial factor that needs to be considered. Stamp duty is a law and needs to be paid within 30 days. If the property is valued between £125,000 and £250,000 a 5% stamp duty tax applies, between £250,000 and £925,000 it is 8%,, between £925,000 and £1.5million you pay 10% on the portion of the sale over £925,000.01 and 12% on any remaining amount (over the £1.5m).
It is important to factor in stamp duty taxes in when investing in property. As a property investor it’s also worth noting here that additional properties (other than the one in which you reside) are also subject to an additional SDLT cost of 3% on top of the normal rates that apply. There are exceptions to this and you can refer to the Gov.co.uk website for further clarification.
It’s of paramount importance that a property investor is aware of their financial liabilities in relation to any new investment. With recent changes to tax relief it is advisable to ensure that with those changes your investments are still profitable and to make adjustments to rents on rental properties if necessary.
In conclusion, capital gains tax and mortgage interest tax relief are factors property investors need to consider. Speaking to your financial advisor or accountant is a good way to decide what the best options are for you and your property investing business.