Whether you are interested in purchasing a portfolio of properties for buy-to-let purposes, or you want to buy one additional property to sell on for a profit in years to come, Britain’s property market has long been considered a stable and potentially very lucrative place to invest your money.
However, there are a number of tax challenges investors will face when it comes to purchasing, selling or letting a property – and it is important to be fully aware of these before you start.
Firstly, following changes made to Stamp Duty Land Tax (SDLT) in recent years, any existing homeowners who purchase a second or ‘additional’ property – i.e. for buy-to-let purposes – will need to pay an additional three per cent SDLT surcharge upon purchase.
Investors need to keep this in mind, as the rules governing SDLT can prove costly – and it is important to ensure you can cover these costs, yet continue to make a profit when you come to let out the property. It is equally important to factor in other typical purchase costs such as conveyancing and surveyors’ fees.
An average investor purchasing a £150,000 will effectively lose £5,000 in SDLT. On top of this, legal fees can cost anywhere between £850 and £1,500.
Secondly, changes to mortgage stress tests introduced by the Prudential Regulation Authority could also pose complications for buy-to-let investors – particularly those who already manage a portfolio of mortgaged properties.
Simply put, lenders are today required to very carefully assess the affordability of landlords before they are able to offer them a mortgage. Following the changes, portfolio landlords in particular need to provide extensive tax and financial information to lenders in order to meet the requirements of these so-called stress tests. This may require seeking specialist tax advice ahead of time to ensure your records are in good shape and that you will not be denied a mortgage.
Thirdly, existing and aspiring landlords need to be aware of ongoing changes to mortgage interest tax relief. First introduced in April 2017, these gradual changes will see the tax relief landlords are entitled to claim for finance costs slowly restricted to the basic rate of income tax between now and 2020.
Previously, landlords were able to deduct mortgage interest and other allowable costs from their total taxable rental income, meaning that the new changes will weigh heavily on landlords’ final profits.
Finally, if you purchase a property with a view to disposing of it at a later date once it has appreciated in value, or if you are interested in selling off an existing buy-to-let property, it is important to be aware of Capital Gains Tax (CGT) – a tax charged on the disposal of appreciating assets such as additional homes.
Nevertheless, despite all of the tax challenges faced, property investment remains incredibly popular in the UK and letting out property can still prove lucrative if the right advice is sought. The same can be said for purchasing the right property to sell on for a profit at a later date.
If you are interested in investing in property, but require specialist tax advice tailored to suit your unique circumstances, get in touch with JW Hinks today.