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Tax Implications for Property Owners

We are frequently asked tax related questions by would-be property investors and landlords alike, and due to the complexities involved, we thought it would be a good idea to clarify the tax implications when buying, letting or selling property here in the UK.

Here are the liability guidelines currently in place from HMRC.

Buying Property in the UK

If you buy property for more than £125,000, you pay Stamp Duty Land Tax. The rate you pay depends on the purchase price of the property. You still have to pay if you swap something of economic value for a property, eg shares or another property.

Please follow the link to understand more about stamp duty and to gain access to our useful stamp duty calculator. Stamp Duty made simple

Selling Property in the UK

Tax on UK property sales only applies when selling an investment or secondary property. Capital Gains Tax is a tax on the profit when you sell a property that's increased in value. It's the gain you make that's taxed, not the amount of money you receive. Remember, associated costs such as home improvements, estate agent and solicitors fees are deductible from the taxable profit.

This applies to; Buy-To-Let property, Business property, Inherited property and Land.

Long term capital gains rates, which kick in only if you've owned the asset for 366 days, range from 5% to 28% of the gain on the sale, depending on your income level. Most people pay the 15% rate. The short term rate, which applies to the sale of any capital asset held for less than 366 days, is the same as your ordinary income tax rate and could be as high as 35%.

Please also remember that tax relief is available if you own more than one home, you can nominate which will be tax-free. It doesn't have to be the one where you live most of the time.

Generally, it makes sense to nominate the one expected to make the largest gain. You have two years from when you get a new home to make the nomination.You don't pay tax, otherwise known as 'Capital Gains Tax' when selling your home if all of the following apply:

  • You've lived in it as your main (primary) home for all the time you've owned it.
  • You haven't let part of it out or used part of it for business only.
  • The grounds, including the buildings, are smaller than 5,000 square metres (just over an acre.)

Letting Property in the UK

The tax liability on your property depends on whether you are letting the property out on a permanent basis or just for a holiday home - and also if you are living in the property yourself and renting out a part of it to another person or people as a lodger.

For residential lettings, you only pay tax on your net profit. You can work out how much this is by adding up your annual rental income and your 'allowable expenses' and then taking the expenses away from the income.

If you're employed in another job as well as being a landlord, or if you're currently in receipt of a pension through PAYE, and if the taxable income that you make on your property is less than £2,500, you can arrange to pay the tax due for rentals through PAYE. You should contact your local Tax Office and ask for form P810 which you can then fill out and use to report your taxable income every year.

If the above doesn't apply, you'll have to fill in a Self Assessment tax return. If you make more that £15,000 from property in the UK in one tax year you have to declare this income in the land and property section of a Self Assessment tax return. If the amount you make is under £15,000 you might be able to use a four-page return. Ask your local tax office for advice on your own individual circumstances if you're unsure.

If you have another job as well as being a landlord, taxable profits that you make from letting out your property are added to your overall income. You pay the normal rates of income tax on this, as if it were another job.

The following deductions can be made from taxable profit;

  • Accountancy expenses (incurred in preparing rental business accounts but not for preparing personal tax returns)
  • Letting agents and legal fees
  • Associated lettings costs such as cleaning, inventories, gas safety certificates, professional cleaning, gardening etc
  • Council Tax while the property is vacant and available for letting.
  • Ground rent and Service charges.
  • Insurances.
  • Mortgage interest charges. As such you can deduct any funds used to pay the mortgage interest charged by your lender. The capital repayment element of your mortgage is not deductible (further conditions apply.)
  • Repairs which are not significant improvements to the property, including: damp and rot treatment; mending broken windows, doors, furniture, cookers, lifts etc; painting and decorating; replacing roof slates, flashing and gutters; repainting; and stone cleaning.
  • Water rates.

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