If you’re buying a property, it’s essential to consider tax. Getting it right can greatly increase your overall financial returns on the property.
Taxes with an immediate impact on property purchases include:
- Stamp Duty Land Tax (SDLT) – this is a transfer tax which is payable by the purchaser on acquisition of a UK property and is normally calculated by reference to the price paid for the property. We have more information about SDLT here.
- VAT – in some cases the vendor of a property has to add VAT to the sale price. Depending on how you as purchaser intend to use the property, you may be able to obtain a refund of the VAT paid from HMRC. Find out more about VAT on land and property here.
For some properties, it may be possible to make a claim for capital allowances on the property. Capital allowances are the UK’s form of “tax depreciation” for the property purchase price. Capital allowances are claimed in the owner’s annual tax returns. But to make a claim, action is often needed before the property is purchased and so this aspect needs to be considered when buying the property.
Similarly, taxes on rental income or sale of a property don’t bite until rent is earned or the property is sold, but the ownership structure adopted can have a fundamental impact on the tax payable. Once a property is acquired it is often very difficult to change the ownership structure –for example, if you buy a property personally and then decide it should be owned by your company, tax charges can arise on transfer. So the time to think about ownership structure is before the property is acquired.
Rental income is subject to income tax or corporation tax for companies. As a taxpayer, you are allowed to deduct expenses in computing your net taxable income. These deductions include interest expense and “capital allowances”.
The rules for interest deductions are complex in particular:
- Relief for interest can be denied or restricted if interest is paid to a connected person.
- Interest relief is restricted for individuals who own rental properties. These rules do not apply to companies. In some cases it can be better to buy a rental property through a company; many landlords have transferred their portfolios to a company, or are looking into doing so. More information on this can be found in our briefing Is it time for private landlords to look at commercial property?
Our detailed look at capital allowances can be found here.
Non-UK residents are liable to UK income tax on their rental income in much the same way as UK residents.
Non-UK resident companies have previously been subject to income tax on their net rental income. However, from April 2020 they will be subject to corporation tax which will bring them more into line with the tax position for UK resident companies. This will include the application of rules which can limit the tax deduction for interest payable by a company or group in excess of £2m per year.
You can find more information on how non-residents are taxed on capital gains in our notes for non-resident investors in UK property.
UK property owners are within the scope of UK Inheritance Tax on their UK properties. We have details here of how our specialists can support you in estate and inheritance tax planning.
For more information on property purchasing, property ownership and property tax, please get in touch with us using our enquiry form.