How are investment properties taxed?

Nov 1, 2022 | Self-employed

Property has been a popular investment for several years now, providing a steady income for investors and a great opportunity for returns.

This has been particularly appealing at a time of relatively low interest rates, and high growth in property values.

While the rate at which house prices are growing isn’t as dramatic as it once was, the average UK house price still stood at £296,000 in August 2022, £35,570 more than a year earlier – and £125,098 more than 10 years earlier, in 2012.

That said, investing in property isn’t a decision to be taken lightly, and there are several things to be aware of from a tax point of view.

Tax when you purchase an additional property

First of all, you’ll need to take into account stamp duty if your purchase means you’ll own more than one property.

You’ll need to pay extra stamp duty on the purchase of any additional residential properties – whether you plan to use it as a second home, a buy-to-let, a holiday let or anything else.

The amount you’ll pay varies depending on which region of the UK you’re in, but in England and Northern Ireland this is a 3% surcharge on top of the usual stamp duty land tax rates.

Letting your property

Many people choose to let out their additional property, providing a regular income while they own it.

If you do this, you’ll usually need to pay income tax on the rent you receive, after deducting any allowances and expenses you qualify for.

You can claim the property allowance, for instance, and get up to £1,000 in property income a year tax-free. But be aware that you can’t deduct expenses if you claim this – so you’ll need to work out which is a more tax-efficient option.

There are also specific reliefs if you’re renting a room in a property you also live in, or if you’re offering accommodation as a furnished holiday let.

If HMRC sees your activities as a trade (rather than investment) you’ll see some differences in the way you’re taxed, including having to pay National Insurance and being eligible for different tax reliefs.

Generally speaking, HMRC doesn’t see letting property as a trade, but this might be the case if you’re running a business like a guesthouse or B&B, or if you’re a professional property developer.

Finally, if you purchase and let the property as a limited company, your company will pay corporation tax on its profits.

Tax when you sell an additional property

When the time comes to sell your property, you may need to pay capital gains tax (CGT). This is due on the gain you make – the difference in value between when you bought the property and sold it.

This must be reported and paid within 60 days of the sale.

CGT for residential property is charged at 18% within the basic-rate tax band, and 28% for higher or additional rate taxpayers.

You might be eligible for some tax relief if you lived in the property yourself for a period of time, depending on how long you were there.

For more in-depth advice on tax on your investment property, talk to us.

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