There is no doubt that with the enduring popularity of TV shows like ‘Homes Under the Hammer’, property development still looks like an appealing career option. Purchasing properties at the right price, giving them some TLC and selling them on, or developing a portfolio of rental properties, can be a lucrative business move.
As always, you should get the right information from your accountant to avoid any surprise tax penalties before diving headfirst into any sort of property investment!
Stamp Duty…. +3%
You will be familiar with paying stamp duty on your primary property where the value is £125,000 or more. Stamp duty increases incrementally at the £125,000 threshold and upwards and again at £250,000 plus.
As an investor, however if you are buying a house for £40,000 or more, the stamp duty payable will be +3% of total purchase price in addition to the standard stamp duty. If the value is £125k or above, the 3% will be payable in addition to the standard 1% plus stamp duty.
See the following example for details of how this investor rate will affect your up-front purchase costs.
If you are buying house over £40k it is +3% of total purchase price (as an investor) this is in addition to the standard stamp duty set out below:
0-125,000 – 0%
125,001 -250,000 – 2%
250,001 – 925,000 – 5%
925,001 – 1,500,000 – 10%
1,500,001 and above – 12%
Unlike the investor stamp duty, the standard stamp duty is only payable at the incremental rate. For instance, if you bought a property for £275,000. There would be no standard stamp duty on the first £125,000. Then you would pay 2% standard stamp duty on £125,000 (Amount between the £125k to £250k bracket, then would then pay 5% on the £25,000 which falls into the next bracket of stamp duty. Then the investor stamp duty of 3% on the entire £275,000 purchase.
Financing:
- If you are just starting out in property development or BTL (buy to let), consider your plans; are you intending to sell the property or keep it as a rental?
- If you intend to keep it and rent it out, it can be beneficial to set up a limited company with your accountant. While financing a property as a limited company costs more, it is fully tax deductible. Meanwhile, although a buy to let mortgage is cheaper in terms of interest repayments, your mortgage interest relief rate will only be at 20%.
- If you are a self-employed property investor, certain mortgage companies will only allow developers a limited number of mortgages to manage their exposure to risk.
Stick or switch?
- If you intend to sell the property and you are a limited company, you will be liable for tax on the sale amount.
- If you’re sticking, think about how you’re going to operate the property: Will it be as a long or short-term rental or a corporate let? The more lucrative options often require more effort from you e.g. arranging cleaners for short term or corporate lets, and having the correct operating licences e.g. a tourism licence to operate as an Air B n B.
- Alternatively, you can pay a company to manage your property who will look after the day to day management issues.
- You will also need to be VAT registered if achieving £85k gross income. This threshold can be easily reached if you own 2-3 short term rental properties at 70% average occupancy.
Declaring rental income in your self-assessment:
- All rent paid is determined as income by the HMRC, even if it goes entirely to the mortgage provider (except for expenses and interest relief, although this could be partly restricted)
- As a self-employed property developer however, you can offset expenses phone, broadband, mileage, training, use of home as an office etc against your tax bill.
- Another point to note is how rental income can push your earnings into a higher tax bracket. For example, someone earning £47.5k can be pushed into the higher tax rate by mortgage interest restriction.
- By 2021 the mortgage interest restriction will be fully phased in, so more people will be paying tax at a higher rate
Example based on someone earning £50,000 with £9,000 in rental income, £2,000 in tax deductible expenses and a further £5,000 in mortgage interest.
|
Old rules |
Transitional rules |
New rules |
|||
|---|---|---|---|---|---|
|
2016/17 |
2017/18 |
2018/19 |
2019/20 |
2020/21 |
|
|
Rental income |
£9,000 |
£9,000 |
£9,000 |
£9,000 |
£9,000 |
|
Mortgage interest |
£5,000 |
£5,000 |
£5,000 |
£5,000 |
£5,000 |
|
Profit before tax |
£2,000 |
£2,000 |
£2,000 |
£2,000 |
£2,000 |
|
% interest relief |
100% |
75% |
50% |
25% |
0% |
|
Interest now taxable |
£0 |
£1,250 |
£2,500 |
£3,750 |
£5,000 |
|
Taxable profit |
£2,000 |
£3,250 |
£4,500 |
£5,750 |
£7,000 |
|
Tax chargeable |
£800 |
£800 |
£960 |
£1,460 |
£1,960 |
|
Less 20% tax credit |
£0 |
-£250 |
-£500 |
-£750 |
-£1,000 |
|
Tax due |
£800 |
£550 |
£460 |
£710 |
£960 |
|
Net profit after tax |
£1,200 |
£1,450 |
£1,540 |
£1,290 |
£1,040 |
Notes to self:
- Capital Gains allowance is one of most underused tax management tools available to owners of multiple properties. In 2019-2020, current HMRC rules will allow you to sell one property a year with a capital gains allowance of up to £12k e.g. buy at 100k sell at 112k you won’t pay tax on the profit
- Not in my name! If you have an investment property in your name and you ever intend to sell that property, speak to your accountant. You can register a second or third property in your spouse’s or children’s names, however bear in mind that if things don’t work out, they will have the right to claim a share. If you don’t put the right protection in place.
To discuss property investment tax, get in touch at accounts@nbasconsultants.co.uk