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How To Structure Your Purchase
In the UK, property owners are hit with some of the highest taxes around. Certainly, that was the case when the government’s think tank, The Policy Exchange, revealed its findings five years ago. At 4.1% gross, the UK figure far exceeded the Organisation for Economic Co-operation and Development (OECD) average of 1.8%.
In fact, the UK’s property taxes were the highest of all 34 nations looked at. Canada was next highest at 3.5% of national income, the USA had a figure of 3%, Japan’s was 2.8% and Germany property owners paid just 0.9%.
So what are these taxes and why are they so high? Well, firstly there is Stamp Duty which is now extended to second homes, hitting landlords hardest. Not only that, it hasn’t kept up with house price inflation, meaning many properties now fall into higher tax bands. Then, there is Council Tax which is increasing for many, as local authorities battle to stay within government-slashed budgets. And as for the other taxes, here’s a quick list:
Additional property taxes
Capital Gains Tax – This is what you’ll pay when you come to sell a buy to let property, if you’ve made a profit in doing so. This is currently calculated at 18% or 28%, depending on which tax bracket you’re in, but is due to increase next year. If your property is listed as a company though, you’ll currently only pay Capital Gains of 20%, regardless of which tax bracket you’re in;
VAT – you’ll pay this on renovations such as turning a dwelling house into a multi-let, or a commercial premises into residential. However, under the Urban Regeneration Scheme, any renovations will be subject to just 5% VAT rather than the standard 20%;
Company Tax – buy to let properties held in a limited company fund is subject to company tax (currently 19% but due to come down to 18% in 2020). The big benefit though, is that the 19% tax is only applicable to profits less than 300,000 a year (and not total income, as in personal landlord tax). This should make it a less expensive route for new property investors. Existing buy to let landlords will have to pay capital gains tax, as well as additional Stamp Duty to switch though, so may not financially be worth the trouble;
Income Tax – for the general population, this is paid on profit from income (i.e. of a buy to let business). However, a recent change in the law means that landlords will be charged on overall net income i.e. the full rent, rather than just the profit once the monthly mortgage of the profit is paid. The rate charged depends on which particular tax bracket you’re in, but it could be as much as 45%. The fact that the full income is counted could push many landlords into a higher tax bracket;
Inheritance Tax – if you inherit a property, then you’ll have to pay this (unless you’ve been ‘gifted’ a lump sum prior to the owner’s death). At the moment, in the UK the threshold is £325,000; after that it’s a whopping 40%.
For more information on taxes, how to structure your investment and how Peninsular Property may be able to help feel free to call our team of experts for an informal chat on 0151 378 1074 or via