Stamp Duty
When you buy a property, the value is assessed for stamp duty.
The standard rates for England and Northern Ireland are:
- 0% on the first £250,000
- 5% on the next £675,000
- 10% on the next £575,000
- 12% on the remainder (affecting properties worth more than £1.5 million)
The stamp duty threshold was recently increased from £125,000 to £250,000. It was announced in the Autumn statement that the thresholds will return to normal in March 2025, with a rate of 2% payable on properties valued between £125,000 and £250,000.
The rates and terminology are different in Scotland and Wales.
The rates are also different for commercial property. The stamp duty threshold increase doesn’t apply on commercial purchases, but the rates are generally lower than on residential property.
Stamp Duty Surcharge
If you are buying a residential property in addition to your main residence, a stamp duty surcharge will normally apply. The rate is 3% in England and Northern Ireland, and 4% in Scotland and Wales. This is charged on top of the standard rate of stamp duty. It applies whether you are buying a second home or a property to let.
Properties worth under £40,000 are exempt from the surcharge.
The surcharge cannot be avoided if your declared main residence is abroad. In fact, a further 2% will be added to the stamp duty bill for overseas buyers, taking the total surcharge to 5% in addition to the standard rates. This means that an overseas buyer could pay stamp duty at a rate of up to 17% on the highest band of the most expensive properties.
The stamp duty surcharge is a major factor in the decision to become a landlord or to add to your property portfolio.
Income Tax and Pensions
The current tax position is as follows:
- You can deduct allowable expenses from your rental income for tax purposes. This could include maintenance and repairs, utility bills, insurance, professional fees, and mileage incurred in the running of the property business.
- Improvements and other items of capital expenditure cannot be set against rental income.
- Your profit from property rental is added to your income for the year, and taxed accordingly.
- Alternatively, you can claim an allowance of £1,000 per year. While this is a simpler approach that requires less paperwork, it’s unlikely to cover all of the expenses incurred in a typical property business.
- Before April 2017, it was possible to claim mortgage interest as an allowable expense. However, measures were gradually introduced to limit tax relief on mortgage interest for landlords.
- Currently, you can claim a tax credit equivalent to 20% of your mortgage interest. This means that higher rate taxpayers will pay more tax than under the previous regime.
- Property rental income is not subject to National Insurance contributions. However, this means that you cannot build up a State Pension solely through a buy-to-let business. You may want to look into voluntary contributions to keep your record up to date.
- Similarly, rental income is not taken into account when calculating your allowable pension contributions. If your only income comes from your property business, your tax-relievable pension contributions will be limited to £3,600 per year (gross).
Capital Gains Tax
Capital Gains Tax (CGT) will normally be payable when you sell property and make a profit. This works as follows:
- CGT applies to any property that is not your main residence. You have 60 days from the date of sale to report and pay any CGT due.
- If the property was your home at any point, you can claim relief against the period in which you lived there, as well as the final 9 months of ownership.
- You have an annual exemption of £12,300. This is the amount of gain that can be realised before you start to pay tax. This exemption is reducing to £6,000 from April 2023 and to £3,000 from April 2024.
- You can also deduct the costs of purchase, sale, improvements, capital expenditure, and professional fees from your taxable gain.
- After any deductions, reliefs and exemptions, the rates of tax are 18% for a basic rate taxpayer and 28% for a higher rate taxpayer. These are higher than the rates on other types of investment. If the gain takes your total income over the higher rate threshold, you will pay the 28% rate of CGT on that portion of the gain.
- The tax will apply even if you give the property away or sell it to a family member for less than it is worth. In these situations, the disposal value is deemed to be the market value.
- The exception is if you give the property to a spouse or place it in joint names. This is ignored for CGT purposes, and jointly owned properties can benefit from two annual exemptions. However, the ‘base cost’ for the CGT calculation will be the amount you paid for the property, not the value when you made the gift. The tax savings should be weighed up against the legal costs of changing the ownership of the property.
Should You Set Up a Property Company?
If you plan on acquiring multiple properties, it could be worth setting up a property company.
This has the following advantages:
- Mortgage interest is allowable for Corporation Tax relief.
- You can structure your income in the form of salary and dividends, which can be more flexible and tax-efficient.
- You can make pension contributions from the business, which are not limited by your earnings. The company can contribute up to £40,000 per year to your pension (subject to certain exceptions) providing this is deemed reasonable by the Local Inspector of Taxes.
- The company is a separate legal entity, which can offer you some protection.
However:
- The stamp duty surcharge will still apply on residential purchases.
- If you already own the properties, you may need to pay CGT and stamp duty in order to move them to a company structure.
- A trading company can benefit from Business Relief, which can reduce Inheritance Tax. A property company would not qualify.
- The dividend allowance, currently £2,000 per year, is reducing to £1,000 from April 2023 and to £500 from April 2024. This could affect the tax-efficiency of a limited company.
Tax advice is recommended if you are considering investing in property or setting up a property company. There may be other investments that suit your circumstances, are more tax-efficient, and are easier to sell.
Please don’t hesitate to contact a member of the team to find out more about investments and tax planning.
