Your guide to Property Tax For Investors
Using Ward Williams as your Tax Adviser
Ward Williams is a member of the Institute of Chartered Accountants in England and Wales. As Chartered Accountants you can be confident that we have the specialist knowledge to assist you with your affairs.
Ward Williams can help you in a variety of ways:
Self Assessment tax returns – proactive personal tax advice and compliance for private landlords. Partner and partnership tax returns
Business services - property accounts preparation, bookkeeping/VAT, audit
Tax planning – comprehensive property tax advice, planning and consultancy to minimise your tax liabilities, tailored to specific needs. To include income tax, capital gains tax, corporation tax, inheritance tax, VAT and stamp duty land tax advice
Capital Gains Tax (CGT) – assisting with the completion and submission of online CGT returns
Making Tax Digital (MTD) – ensuring that you are MTD compliant, assisting with digital record keeping in preparation for the introduction of MTD for income tax
International tax advice – advice for overseas clients holding interests in UK land & property
Business planning – advising on the best structure for your business
Annual tax on enveloped dwellings (ATED) – assisting in advising nonnatural entities that own UK residential property
Will writing, probate & estate administration – we are licensed to provide probate and estate administration services, together with a comprehensive Will writing service
Succession planning (Trusts) – planning for the future, keeping investment properties within the family and providing for children or the next generation by the use of a Trust
Structure
The structure through which to operate should be considered carefully at the outset. This may be by way of:
Personal ownership (whether individually or jointly with others) Partnership
Limited company Trust
Usually, personal or joint ownership will be most suitable for modest investors. Individuals can hold property with one or more persons. Generally, individuals who hold property will be taxed on the rental profits in accordance with the underlying beneficial ownership.
Where married couples or civil partners jointly own property, however, the rental income is automatically taxed upon them equally, i.e. 50:50 (default position). It is possible, however, to own the property in unequal shares and file an election with HMRC to be taxed on the actual basis (beneficial interest). This election is a useful tool for ensuring that allowances and rate bands are fully utilised with a view to mitigating the overall income tax liability.
Where property is held jointly as a genuine partnership, as opposed to joint ownership of investment property, a business partnership can be formed to manage the property letting business. Where such a partnership exists, the profits and losses from the letting business activity can be allocated between the various partners in any share agreed upon. The profit share can be varied and does not have to follow the underlying ownership of the partnership assets (the properties).
Partnership businesses can incorporate an existing property portfolio. Care needs to be taken here due to the stamp duty land tax and capital gains tax implications on incorporation.
A company is most likely to be the right vehicle for larger investors who are planning to hold property ownership long-term. Profits can be sheltered from higher rates of income tax and there is flexibility over the extraction of profits. However, there is the potential double tax charge should a property be sold and the funds are subsequently extracted by the shareholders. The additional compliance and administration of operating through a corporate structure also needs to be considered.
Trusts have long been used as a means for people to protect their assets and to control their management, as well as determine how those assets are transferred to others and when. Trusts may be appropriate as part of an inheritance tax planning strategy and succession planning.
Income tax
Individuals are liable to income tax on the profits they make from their rental business. All UK rental activities form a single business. A statement of income and expenditure needs to be drawn up to 5 April each year. The profit is calculated on a cash basis (subject to receipts not exceeding £150,000) unless electing for traditional accounting principles to apply.
The income tax due is collected through the self assessment system. Additional quarterly reporting obligations will be implemented as from April 2026 (see section Making Tax Digital for income Tax).
Making Tax Digital for Income Tax (MTD ITSA)
Making Tax Digital is a government initiative with the stated aim of ‘bringing the tax system into the 21st century’. The regime will ultimately move taxpayers to a fully digital system, with businesses and individuals required to register, file, pay and update their information using a secure online tax account.
MTD ITSA requires individuals and businesses to:
keep and preserve certain specific business records digitally, in what is known as MTD functional compatible software file quarterly updates with HMRC via that software complete an end of year finalisation process where relevant
The Government has announced that making tax digital for income tax (MTD ITSA) for the self-employed and landlords will be delayed until April 2026.
The new timetable provides that a person will be required to use MTD for ITSA if they are self-employed or a landlord:
from April 2026, if their annual business or property income is more than £50,000; and from April 2027, if their annual business or property income is between £30,000 and £50,000.
There will also be a review of how MTD for ITSA should work for businesses under the £30,000 income threshold.
Before this announcement, self-employed businesses and landlords with annual business or property income above £10,000 were to have been required to follow the rules for MTD for ITSA from April 2024.
General partnerships were due to be mandated to adhere to the new reporting requirements from April 2025, however this will no longer happen. No timescale has been provided for when partnerships will need to comply with these regulations, although the government have confirmed that it intends to introduce MTD ITSA for partnerships at a later date.
Repairs – revenue versus capital expenditure
Expenditure on general repair and maintenance works is allowable as a business expense (revenue expenditure) i.e. the cost incurred can be offset against the rental income.
The cost of repairing a dilapidated asset (such as a roof) is generally considered to be a ‘repair’, whereas replacing the entirety of an asset is deemed to be ‘capital’ expenditure. Replacing a fixture (such as a kitchen or bathroom) is a repair to a building and not the replacement of an asset in its entirety. For such expenditure to be considered a revenue expense, the replacement fixture must be similar to the replaced fixture (a ‘like for like’ replacement) or of a modern day equivalent.
Where improvements and/or upgrades have been made to fixtures, the expenditure is deemed to be ‘capital’ by nature and cannot be considered an allowable revenue cost. Expenditure which greatly enhances the value and nature of a property, such as a loft conversion or extension, is capital. Such costs are added to the cost of the property for capital gains tax purposes.
Replacement of Domestic Items Relief (RODIR)
Introduced from April 2016, under the RODIR legislation, landlords can claim for the actual cost of replacing furniture and furnishings at a rental property (not furnished holiday lets). The relief only applies to replacement costs. The initial cost of furnishing a property is not tax deductible.
The relief is calculated based on the replacement cost less any sale proceeds for the replaced item. Any improvement cost is also excluded from the relief due.
Replacement items that qualify for RODIR include freestanding white goods, moveable furniture, floor coverings and furnishings.
Finance costs
Allowable finance costs include mortgage interest plus related incidental costs of obtaining finance, such as arrangement fees and broker fees. Tax relief is not available on capital repayments.
Fees that relate to a capital matter, such as the purchase or sale of a property are capital.
Quite often investment properties are financed partly by loans, which may be secured against the investment properties themselves, or on the investor’s private home. Generally, it is the ‘purpose’ for which the funds are used which determines the tax treatment. For example, if loan finance is taken out to assist with the purchase of a rental property, income tax relief will be available on the loan interest suffered.
Loan interest relief is restricted where the overall borrowings exceed the value(s) of the property portfolio when first introduced to the lettings business. Care needs to be taken when refinancing an existing rental property.
New rules were introduced on 6 April 2017 limiting finance costs which an individual can deduct as an expense of a property business to the basic rate of income tax. The restriction applies to all finance costs, not just mortgage interest. The rules were phased in over 4 years, so the full restriction applies from the 2020/21 tax year. Furnished holiday lets are not subject to these restrictions.
Furnished Holiday Lettings (FHL)
FHL are charged under the property income rules. Special tax rules allow the commercial letting of FHL to be treated as a trade for some specified purposes – more beneficial capital allowances (on the cost of furniture & furnishings as well as plant & machinery) and certain capital gains tax reliefs (rollover relief, business asset disposal relief etc.).
Profits or losses arising from a FHL businesses should be calculated separately from other rental business profits and losses. Where an FHL let results in a loss, these losses can only be carried forward and set against the FHL profits of the same FHL business. FHL in the UK are treated as a separate business to an FHL in the EEA.
A supply of holiday accommodation is standard rated for VAT purposes. Most property investors will not need to consider VAT, as their annual rental turnover will be under the VAT registration threshold. Care will however need to be taken by those who are already VAT registered , as the registration applies to all business activities of the individual or entity registered.
Rent a room
Under the Rent a Room Scheme a qualifying individual is exempt from income tax on income from letting furnished accommodation in their only or main home, so long as the gross receipts are less than the exemption limit. However, you cannot then claim any of the expenses of the letting.
If the gross receipts exceed the exemption limit, you have a choice either to pay tax on the excess or to claim a deduction for actual property expenses in the normal way.
Unfurnished lettings and rooms let as an office or for other business purposes do not qualify.
Trading in property
Some investors buy property and retain it as a long-term investment. In these circumstances, when a property is disposed of at a future date, the gain arising will usually be subject to capital gains tax. In contrast, where properties are held for a relatively short period with a view to making a profit on sale, the activity may be considered that of trading as opposed to property investment. Assuming property is held personally for trading purposes, any gain here may be subjected to income tax and national insurance contributions, rather than lower capital gains tax rates.
Capital gains tax (CGT)
Principal private residence (PPR) relief is available if the property in question has been occupied as your only or main residence i.e. the property has been resided in as your ‘home’. The gain accruing during a period of occupation is exempt from CGT. In addition, if the property has been occupied as a home at any stage, the gain accruing in the final 9 month period is also exempt from CGT. Other permitted periods of absence are also exempt if you resume residence (deemed occupation rules).
HMRC may challenge a claim for PPR relief if it is felt that the dwelling has not been occupied as a home. Relief will also be denied where occupation of a dwelling is merely to gain a tax advantage. HMRC will look at the quality of the occupation, not the quantity. Some form of permanence will need to be demonstrated in regard to the residence.
Where more than one residence has been occupied concurrently, a PPR election can be filed with HMRC (within 2 years of taking up occupation of the second residence) in order to elect which property is the main residence for tax purposes. Married couples can only have one main residence between them.
There is now an additional reporting requirement with HMRC. In the following circumstances, a sale of an interest in UK situated land & property needs to be reported to HMRC via an online CGT return within 60 days of completion. Any CGT due will also need to be cleared within the same 60-day period. Late filing penalties apply.
UK resident individuals – sale of an interest in UK situated residential dwellings where there is an exposure to CGT
Non-UK resident individuals – sale of a direct or indirect interest in UK situated land & property whether there is an exposure to CGT or not
Property used in a business – business asset disposal relief (BADR)
A claim for BADR allows for a reduced CGT rate of 10% on the disposal of properties owned personally and used within the owner’s trading business or personal company. Broadly speaking, the sale will need to be made in conjunction with a sale of the business itself.
Relief is restricted where rent has been charged for its use.
Non-resident individuals
Where a landlord resides outside of the UK and holds UK property personally, the letting agent or tenant has an obligation to act as a collecting agent and deduct tax from the property income and pay the tax across to HMRC (under the non-resident landlord scheme). In such cases, however, you can apply to HMRC to have your rental income paid without the deduction of tax at source.
Non-resident capital gains tax is covered above (‘Capital gains tax’). A PPR election is available where the non-resident individual spends at least 90 days per tax year at the residence i.e. the residence has to be used as a second or holiday home.
From 6 April 2019 non-UK residents are subject to UK tax on gains on direct and certain indirect disposals of interests in UK immovable property. Broadly, the indirect disposal rules will apply where a person makes a disposal of an entity in which it has at least a 25% interest where that entity derives 75% or more of its gross asset value from UK land. Disposals of interests in entities where the property is used in a trade are excluded from the charge, subject to certain conditions.
Non-resident companies
Where a non-UK resident company which is not already within the charge to UK corporation tax becomes chargeable as a result of a disposal of UK property on or after 6 April 2019, it must register within 3 months of the date of that disposal. Corporation tax is generally payable 3 months and 14 days from the date of disposal.
Since 6 April 2020, UK corporation tax (rather than income tax) applies to rental income of UK property investment businesses whether or not the company holding the property is UK resident or non-UK resident. If the rent is to be paid to a non-UK resident company it will be necessary to make an application for rent to be paid gross, otherwise the letting agent or tenant will need to deduct 20% tax from the rent and account for this to HMRC before paying it over to the non-UK resident company.
Stamp Duty Land Tax (SDLT)
SDLT is a levy on transactions in land and buildings in England & N. Ireland.
The rates of SDLT are as follow:
Residential properties – you pay SDLT on increasing portions of the property price above £250,000 when you buy residential property .
Transfers of residential land & buildings (on band of consideration)
£0 – £250,000
£250,001 – £925,000
– £1,500,000
Non-residential – you pay SDLT on increasing portions of the property when you pay £150,000 or more for non-residential property
Non residential (on band of consideration)
£0 - £150,000
£150,001 – £250,000
£250,000
SDLT for buy to let property - an additional 3% surcharge will be charged on each band on purchases of additional residential properties (above the £40,000 threshold). The surcharge will not apply where the purchaser does not own another residential property.
First-Time Buyer relief may apply to residential purchases up to £625,000.
Inheritance tax (IHT)
Whilst business relief is available to allow businesses to pass free of IHT, such relief does not generally apply to property portfolios as they do not constitute a ‘business’.
With structured planning, however, there are steps that can be taken to mitigate the IHT payable on the value of an estate.
Possible lifetime gifting:
Trusts – CGT hold-over relief may allow property to be transferred into a trust without an immediate CGT charge. Care will need to be taken over the value transferred due to lifetime IHT charges. Succession planning can be achieved tax efficiently through the use of trusts.
Outright gifting – consider gifting properties that may have depreciated in value or realise capital losses to offset against capital gains on other gifted assets. Claim PPR relief where applicable.
Shares – gift tranches of shares in property companies over a period of
Succession Planning – why use a trust?
A trust can be a useful vehicle for succession planning and IHT mitigation. Whilst an outright gift of property has the merit of simplicity, an immediate charge to CGT will arise where such a transaction gives rise to a chargeable gain. A settlor is, however, able to hold-over (defer) a chargeable gain when gifting a chargeable asset to a relevant property trust, until such time as the asset is sold or distributed by the trustees.
The use of trusts will also enable the settlor to protect their assets and to retain control over their management, as well as determine how and when those assets are to be transferred to the beneficiaries.
Gifting assets to a trust will also remove those assets from the settlor’s estate for IHT purposes (subject to the settlor surviving 7 years from the date of the gift), whilst allowing some form of ongoing control.
Before creating a trust, the direct tax implications should be considered.
Will Writing, probate & estate administration
Ward Williams has a team dedicated to assisting you with executing or reviewing a Will. Making a Will is the only way to ensure that your wishes are carried out after your death. If you have not made a valid Will, your property will pass according to the Law of Intestacy, which may not be what you would have wished, following many years of building a property portfolio. If you do have a valid Will, it is advisable to have it reviewed every 2-5 years to take into account changes in your circumstances.
As licensed practitioners for probate work, Ward Williams can also help with probate and estate administration.
Value Added Tax (VAT)
Residential lettings is exempt from VAT and so the majority of landlords do not have to consider VAT.
Serviced accommodation, such as a FHL, is however a taxable supply. Therefore, if your annual sales exceeds the VAT registration threshold, you will need to register for VAT.
In regard to property development, VAT relief is available in certain circumstances, for example on the construction of new residential property, the conversion of commercial to residential property and the conversion of single dwellings to multiple occupancy property etc.
The ‘option to tax’ makes supplies subject to VAT which would otherwise have been exempt. The election allows a business to choose to charge VAT on the sale or rental of commercial property. Any option to tax does not affect a residential building or residential part of a building. The key to this is the ability to recover VAT on related costs. Most businesses do not need to opt to tax their trading premises, as they are using the premises for making taxable supplies in their normal business. You only need to consider opting to tax if renting property or selling your trading premises in certain circumstances.
Annual Tax on Enveloped Dwellings (ATED)
Some investors opt to use company structures and trusts to hold UK property. ATED is charged annually on residential property sited in the UK valued at over £500,000 held by a non-natural person, such as a company. The annual tax charge depends on the value of the property.
An ATED return and payment is due within 30 days of the acquisition of a high value residential property by a company or other type of non-natural person. For existing properties, an annual ATED return and tax payment are due by 30 April during the tax year. Late filing and late payment penalties apply.
ATED returns are required even if you wish to claim an exemption from the tax charge. Such reliefs include where property is let to a third party on a commercial basis or where property is being developed for resale by a property developer.
The next step
To arrange a consultation please contact us at property@wardwilliams.co.uk
Contact details for each office are on the back page.
Information for users:
The matters discussed in this guide are by necessity brief and comprise summations and introductions to the subject referred to. The content of this guide should not be considered by any reader to be a substitute for proper professional advice. All information is accurate at the time of going to print (April 2023). Ward Williams accepts no responsibility for any loss arising from any action taken or not taken by anyone using this guide.
