Investing in property is a significant financial decision, no matter how you look at it. Among the various other topics that you need to know about — like the state of the market, how much you can afford, etc. — when you own a home you have to know about property taxes to make informed decisions.
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.
From Stamp Duty Land Tax (SDLT) to Capital Gains Tax (CGT), this article will give you a brief overview of the complexities of property taxation so you can ensure you are well-placed to minimise taxes as part of your financial plan.
Basis of Taxation
The basis for taxing property isn’t exactly straightforward, but to try to simplify: for individuals, property income is calculated on a tax year basis, with accounts prepared up to 5 April. (Accounts can also be prepared up to 31 March.) Income and expenses for buy-to-let properties are pooled together, calculated on a cash basis. So, you’ll need to include rent and expenses when paid or received. Companies, on the other hand, calculate property income according to their accounting period on an accruals basis.
Allowable Deductions and Reliefs
Allowable expenses must be incurred wholly and exclusively for your buy-to-let business. These may include letting agent’s fees, maintenance costs, council tax, property insurance, and more. Deductions can also be claimed for replacing furniture and furnishings, with some considerations for improvements and incidental elements.
Property Allowance
Individuals can claim an annual property allowance of £1,000 as a deduction if it exceeds your actual allowable deductions and reliefs.
Tax Implications of Buying a Property
Once you’ve found the right property, understanding the tax implications of your chosen home is crucial.
Stamp Duty Land Tax
Despite incurring various other costs such as lending, legal, and survey costs, just to name a few, SDLT is usually one of the most significant expenses in property purchases. Buy-to-let purchases attract a 3% surcharge regardless of whether you own the property as an individual or through a company.
When you sell or gift properties, you will then have to understand the tax implications.
Capital Gains Tax (CGT)
CGT applies to property sales or gifts. Gains are based on the property’s sale or market value, with deductions for purchase costs and enhancements. Gains will then sit on top of your income for the tax year of sale or disposal. Any part of the gain that falls within your basic rate band will be taxed at 18%, with the remainder taxed at 28%. Additionally, a payment on account due 60 days after completion.
Inheritance Tax (IHT)
IHT is payable at 40% once a nil rate band of £325,000 (up to £650,000 if you benefit from the nil rate band of a deceased spouse or civil partner) is exceeded. Inheritance tax is often a worry of homeowners who hope to leave their home to a loved one. If you give a gift and die within seven years of the gesture then you will have to deal with IHT implications. If your property portfolio is retained until death, it will be included as part of your estate at its value at the time of death.
Minimise Taxes with help from the pros
When you take on the task of becoming a homeowner or an owner of a buy-to-let property, you’ll need to understand property taxes. It can be a lot to handle on your own, but we’re here to help.
The experts at Dental & Medical Financial Services can help you navigate the complex landscape of property taxes while also ensuring that your financial goals are achieved with minimal tax implications. To save on tax, contact us today.