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A property can be a valuable asset. Yet, just like other investments, tax always lurks nearby. How can you minimise needless tax on a property and improve your “real” (after tax) returns? Below, our team at Elmfield Financial Planning in Padiham, Burnley, Lancashire shows how taxes work regarding UK property and how to navigate them wisely in 2022-23. We hope this is useful and please get in touch if you’d like to discuss your own financial plan with us over a free, no-commitment consultation.
Do you pay tax for a house in the UK?
When you sell your main home, you do not pay capital gains tax (CGT) on any profit you make from it. If you originally bought it for £300,000 and you later sell it for £450,000, for instance, then no CGT is due.
However, buyers may need to pay Stamp Duty Land Tax (SDLT) if the property value is over a certain threshold – currently £125,000 in 2022-23. During the pandemic, there was a temporary reduced rate between the 8th July 2020 until 30th June 2021 and from the 1st July 2021 to the 30th September 2021 (inclusive). This raised the SDLT threshold to £500,000. However, it is no longer in effect.
Do I pay tax when I sell other types of property?
Yes, you may need to pay tax if you sell a UK property which is not your home – such as buy-to-let properties, business premises, land and inherited property.
For instance, if you sell a Buy to Let property (outside of a company structure) then you will likely need to pay CGT on any profit this generates. One way to mitigate this is to make use your CGT allowance, which lets you generate up to £12,300 in capital gains before CGT is applicable. If you hold the property with a spouse, then you can combine allowances to earn up to £24,600 in capital gains from a property sale in a single tax year without CGT tax.
If you own property within a company structure, then you may need to pay corporation tax on profits from a sale. This can open up opportunities to reduce tax on your capital gains, since corporation tax is currently lower than CGT bands on individuals above the Basic Rate (19% versus 28% if you pay a higher rate of tax).
However, building a Buy to Let portfolio structure does have its disadvantages which must be weighed carefully with the help of a financial adviser. For instance, a company cannot use the £12,300 CGT-free yearly allowance available to individuals. Moreover, a property is unlikely to qualify for entrepreneurs’ relief since HMRC regards property as an investment (rather than a trade or business). This means that you may need to pay more tax if you later decide to sell all, or part, of your business.
How much income tax do I pay on rental income?
If you let out a property to tenants (e.g. a Buy to Let), then you may need to pay Income Tax on the income. If all of your income for the tax year falls below £12,570 (your Personal Allowance) then you do not pay Income Tax. After this, however, the Basic Rate is 20%. Anything you earn over £50,000 is subject to the 40% Higher Rate.
If you hold a Buy to Let property within a company structure, then any income from tenants to the business may count as a profit – making it subject to corporation tax. Again, this could allow higher earners to save on their tax bill (since 19% corporation tax is lower than the 40% Higher Rate). However, putting property investments into a company structure is a big decision and may not be the right decision for you depending on circumstances.
Do you pay inheritance tax on a property?
Your estate may need to pay inheritance tax (IHT) on a UK property when you die, if the value exceeds your tax-free allowances. In 2022-23, an individual can pass down up to £325,000 to beneficiaries without needing to pay 40% IHT.
There are ways to “extend” your IHT threshold. Firstly, there is a “main residence nil rate band” rule which lets you pass down an extra £175,000 to beneficiaries when you die, provided you hand down your family home to direct descendants (e.g. children). Secondly, you can combine you can pass all of your assets – including property – to your spouse, tax-free, when you die – as well as any unused IHT allowance. This means that, when your spouse eventually dies, you can both pass down a £1m estate to your children, without paying IHT.
For company owners, Business Relief allows certain business assets to be reduced in value for IHT purposes – at 50% or 100%, depending on the asset in question. Land, buildings and machinery is likely to qualify for 50% relief.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
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