Investment Property Tax Benefits
Investing in property can be beneficial for your taxes. No matter the method, there are complex financial issues involved, one of those being tax. With the right knowledge, you can access the many investment property tax benefits available to buyers.
What is property investment?
There are two types of property investment - direct and indirect:
Direct property investment is where you buy all or part of the property yourself. This tends to increase in value as time goes by and you can either live in it or rent it out.
Indirect property investment is where you don’t directly own a property, but get a share of its profits. You have bought into a property fund or company and get dividends and/or capital growth when the fund makes a profit.
Tax benefits on buying and selling property (Direct investment)
Selling property: Capital Gains Tax
Paying Capital Gains Tax (CGT) on the money you make from a property depends on whether this property is your home - the definition of main residence is the property you have lived in for the most time in the last three years.
Selling your principal home in the UK generally means you won’t have to pay CGT, because you can claim Private Residence Relief on profits, subject to conditions being met. If you have let out parts or all of your home during ownership, you may be expected to pay CGT.
If you sell a property you had as a holiday let, rental property or a property you bought for someone else, you cannot claim Private Residence Relief you need to pay CGT.
Buying Property: Stamp Duty Land Tax
If you’re buying a property in England or Northern Ireland, you may have to pay Stamp Duty Land Tax (SDLT). In Wales, Land Transaction Tax applies. In Scotland, it is known as Land and Building Transaction Tax.
In England and Northern Ireland, SDLT applies on property bought for more than £125,000 or on non-residential property that is more than £150,000. Tax rates are applied based on how much the property is worth in total and whether you own other properties and where you live. Put simply, the more expensive a property, the more tax you will have to pay.
However, there are Stamp Duty Land Tax Exemptions which you could be entitled to.
Tax benefits on rental income (Direct investment property)
There are certain benefits you can claim in relation to the rental income you receive on properties.
If you’re renting out a property to someone, there are ways your rental income could be considered for tax purposes:
Furnished holiday lets
Rent a Room relief scheme
With residential letting and furnished holiday lets, investors can claim back expenses to reduce your tax bill. If you’re involved with the Rent a Room relief scheme, you can get a tax-free allowance.
Residential letting as a property investment
If you rent out some or all property for someone to live in, you must pay tax on the profits you make on the rental income. These are treated as a normal part of your income, so you will pay tax at the normal rate. This can be reduced by calculating your profits correctly.
Replacement domestic item relief
While the wear and tear allowance ended in 2016, investors can claim a deduction for the cost of replacing domestic items, including:
Movable furniture such as beds and wardrobes
Furnishings such as carpets and curtains
Holiday letting as an investment property
If you own a property which you rent out as a furnished holiday let, you could get a capital allowance for furnishing the property by meeting these conditions:
It must be in the UK or EEA (European Economic Area)
It can’t be let for over 31 days at a time
It must be available for let for 210 days of the year as a furnished holiday accommodation and actually let for a minimum of 105 days.
You can claim Capital Allowances on fixtures, features and other costs involved with your furnished holiday let. This includes expenditure on fixtures, fitting and furniture.
The 'Rent a Room' relief scheme
If you rent rooms out in your house to lodgers, this can be treated as a residential property letting or you can claim Rent a Room relief. The room must be accessible from your house and not a separate flat, and the lodger must share common areas such as your kitchen.
The Rent a Room Scheme gives you tax benefits if you meet these conditions:
You don’t pay tax on the first £7,500 of your rental income
You can’t deduct any expenses or wear and tear allowances
If you make a loss, you can’t deduct it from other taxable income.
If you jointly own the house, each person can claim £3,750 of tax relief. The combined claim equals up to £7,500 of tax relief under the scheme.
Tax benefits on indirect property investments
Instead of buying and managing property investments yourself, you can invest in property through a joint fund or by buying shares in property schemes or companies. Some of these include special tax benefits.
Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust has two separate parts for tax purposes. The first is a ring-fenced letting business which is exempt from corporation tax. The second is non-ring-fenced activities like property management services, which aren’t.
If the REIT is successful, you’ll receive some of the profits.
It should be noted that:
Payments from the tax-exempt element are considered as UK property income for the investor and are paid net of basic rate tax - non-tax payers can get this back and if the REIT is held in an ISA, investors get the payments gross.
Payments from the non-exempt element are treated like dividends and are paid with a tax credit.
Property Authorised Investment Funds (PAIFs)
This is the most recent form of property investment fund, similar in structure to REITs. They also contain tax benefits, which are passed onto investors.
If you need support working out what tax benefits you’re entitled to in your investment portfolio, the team at CapEx Tax are here to help. We can navigate the complexities of UK tax law to find where you can benefit from tax breaks for the investment you have put into your properties. Contact us today to get started.