The idea of being a property investor excites a wide range of people, whether that is property investment on a full time scale or just something to prop-up the retirement plan. After all, property investment can be a lucrative way to end up with a mortgage-free property to then reap the future benefits of sale or a regular source of income. Tax is one of the main areas though that property investors make mistakes and it can result in losing money and not achieving their initial financial goals.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
The Financial Conduct Authority does not regulate tax advice.
The tax implications of property investment
Tax is prevalent at every stage of property investment and needs to be carefully managed to ensure you don’t end up incurring huge, unexpected tax bills.
- Upon purchase there is Stamp Duty Land Tax (SDLT), which now is subject to a 3% surcharge if the property is not your primary residence, which it is unlikely to be in this circumstance.
- Rental profits are also taxable and it is important to adhere to deadlines set by HMRC
- Upon sale, there is the prospect of Capital Gains Tax (CGT) if you make a profitable gain
- Or, if you want to pass down property as part of your Inheritance plan, there could well be Inheritance Tax (IHT) to pay too
Understanding the tax associated with property investment is made easier with the help of an accountant and financial adviser, who can keep you informed.
3 common tax mistakes for property investors are:
(1) About CGT
The misconception that CGT is based on the equity in the property upon sale, whereas it is in fact calculated by subtracting the purchase price from the sale and multiplying this figure by the CGT rate. There is also an annual tax-free allowance for each individual that can be used to bring down the taxable amount.
In some extreme cases, where the property investor has been using interest-only mortgages, their final CGT bill upon sale is close to, or greater than, the amount of equity remaining once they settle their mortgage debts.
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(2) About Income Tax
The misunderstanding that keeping the rental profits below the personal allowance will mean there is no tax to pay. This is only an option if your rental profits is your only source of income. If you receive a salary, dividends or self-employed profits then everything gets combined and the tax calculated accordingly.
If you fall into higher rate tax as a consequence of your rental profits, then other deductions may also be lost, such as tax credits or child benefit. This is why it is vital to understand your income tax position as a whole.
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(3) About IHT
The mistake that by passing down a property to a family member within seven years of your death, exempts your estate from IHT.
Transferring property is viewed as a sale transaction, which means the family member would likely incur STLD and you would incur CGT.
IHT planning requires special attention in this regard, to ensure you don’t get caught out with details that are not known to everyone.
Get the support you need for your property investment
Dental & Medical Financial Services have been helping doctors and dentists with investment and tax planning for over 25 years. Call to discuss your options with Darren:
Tel: 01403 780 770
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