4 common misunderstandings about tax on property investment

Written by yasiradnan94
21 September 2017

With interest rates low and house prices steadily rising, investing in property is often thought of as the ideal money making opportunity – and an easy, safe bet. It is no wonder then that if you have a little bit of money to invest you are lured by the thought of a regular income, or a boosted retirement pot. However, many do not consider, or are not aware of, all the tax implications they face.

Before spending money on a property investment, read this article and speak to an accountant or financial advisor to find out if it is the right opportunity for you.

Here are 4 common property tax misunderstandings 


1. Stamp Duty

Although Stamp Duty Land Tax (SDLT) is payable on all properties, there is now an additional 3% surcharge on properties that are not your primary residence. So the cost of buying a house or flat as an investment has increased, which might make it less attractive to anyone with a limited budget or with short term profit plans.

2. Capital Gains Tax  

Once a property is sold, it will be subject to Capital Gains Tax (CGT) if a profit is made. While many people think that this tax is paid on the equity in the property at the point of sale, it is in fact based on the sale price minus the purchase price. The taxable amount can be further reduced with a personal annual tax-free allowance, called the Annual Exempt Amount.

If your monthly payments are reducing your mortgage debt, then this calculation might be of benefit. However, having an interest-only mortgage, or taking out additional borrowing against the property, could reduce the profit available – which in some cases could mean making a loss.

3. Income Tax

Individuals receive a personal income tax allowance each year. Unfortunately rental income forms part of this, and is not calculated separately. So any money made from rental property, along with your salary, dividends or self-employed profits received is added together and taxed accordingly. 

In some circumstances this could mean that you are pushed into the higher rate tax bracket which increases your tax burden. It also could mean losing some advantages such as tax credits or child benefit. 

There are also a number of HMRC guidelines and deadlines to meet to declare rental income. It is important to consider the bigger picture before investing in a rental property.

4. Inheritance tax

If you are considering transferring a property into a family member’s name more than seven years prior to death to avoid it being liable for Inheritance Tax (IHT), it is not a simple solution. Handing over property ownership is seen as a sales transaction which potentially makes the agreement subject to SDLT as in a normal house sale. This could mean the family member is liable for this, as you might also be liable for Capital Gains Tax.

Efficient inheritance tax planning is one vital area where you should seek professional advice to ensure you make good decisions and are not caught out by tax regulations.

AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.

Please contact us for more information:
E: [email protected]
T: 020 3866 8951

Follow AJN Accountants on Twitter for regular updates.


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