Tax Talk: Liability and Status with the HMRC
There are two main categories of property investor: ‘investors’ and ‘dealers’, and they’re taxed differently. So one of the first things every investor should do - preferably before you’ve bought any property – is make sure you know how HMRC will class you for tax purposes. Only then can you make proper investment plans and financial projections.
Landlord = Investor
As a general rule, landlords are classed as investors, i.e. they’re investing in buy to let for the long term. HMRC views your property investments as financial assets and you’ll pay Income Tax on the rental income, then Capital Gains Tax when you sell. This is generally more advantageous for individuals, as the current CGT rates are much less than income tax (which you’d have to pay as a dealer), and you’ve also got the benefit of the annual CGT exemption (£11,300 for the tax year 2017-18).
Calculating your tax liability
The rental income you take from the property (minus allowable deductions) is added to your other earned income – e.g. salary or returns from other investments - to calculate your tax liability each year. One important thing to know is that if you’re currently a basic-rate tax payer and your rental income takes you over the higher-rate threshold (currently £33,500 for the 2017/18 tax year), it could mean you losing any benefits you receive or tax breaks you currently benefit from. So do check that with your financial or tax advisor.
If you’re planning to own buy to let property for the average 15-20 years, you’re probably going to have capital gains when you do eventually sell and the rate of tax you pay on your profit depends on your personal tax status.
If you pay tax at the basic-rate, your capital gain will be taxed at the lower rate of 18%; if you’re a higher-rate tax payer, it’s 28%. So if you’re currently earning a total of under £33,500 but expect to be earning a lot more in the future, even though the threshold may rise, it might be wise to budget for an end CGT bill calculated at 28%.
The ‘gain’ for tax purposes is the difference between the purchase price and the sale price. So if you do hold the property for many years and you have already re-mortgaged to release equity, or plan to, don’t make the mistake of thinking you’ll just pay tax on the profit you get when you sell!
If you’re in the business of acquiring land or property purely with the intention to build or improve it then sell it straight on – i.e. you’re not buying to let - it’ll be seen as a professional trade. That’s liable to Income Tax and National Insurance on the trading profit, which is a higher percentage than CGT.
It’s important to understand you can’t choose how you want to class yourself. Your investment activity defines whether you’re an investor or a dealer. A financial advisor or property tax specialist will be able to help you understand how you’ll be classed by HMRC and decide whether it might be more beneficial to change your investment strategy to take advantage of the best financial route for you.
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