Insights Category: Tax Optimisation

Stamp Duty Land Tax (SDLT) is levied upon the acquisition of properties, including buy-to-let properties. The payable amount varies based on the consideration given in return for the property. This will usually be the same as the price paid.

In England, the current rates of SDLT for buy-to-let properties bought for £40,000 or more, applicable when the individual already owns at least one property, are as follows:

‹ 3% on the first £250,000

‹ 8% on the portion up to £925,000

‹ 13% on the portion up to £1.5 million

‹ 15% on everything over that.

This will encompass holiday lets, as well as purchasing a property for children if the parents leave their name on the title deeds or vice versa. SDLT must be settled within 14 days following the completion of the property purchase. However, the amount of SDLT paid is deductible from any capital gains realised when the property is sold or gifted.

Different rates (of Land and Buildings Transaction Tax and Land Transaction Tax respectively) apply in Scotland and Wales.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

The sale of property (other than your main residence) may result in a capital gain. Certain ‘allowable costs’ such as SDLT and estate agent/solicitor’s fees and money spent on renovation can be deducted from the gain. In addition, each individual owner has an annual allowance which can be offset against any gain if it has not been used elsewhere in the same tax year. This is known as the annual exempt amount and it amounts to £3,000 per individual in the 2024/25 tax year.

Although Capital Gains Tax (CGT) is levied on gains made on disposal of most chargeable assets at the rates of 10% and 20% (for basic and higher rate taxpayers respectively), property gains are taxed at higher rates. At the Spring Budget, the government reduced the higher rate of CGT payable on gains made on UK residential property disposals from 28% to 24%, effective from 6 April 2024. For property owners classified as basic rate taxpayers, the CGT rate remains at 18% on such proportion of the gain that sits within basic rate when added to other income.

Reducing CGT liability

There are legitimate strategies to reduce or defer the amount of Capital Gains Tax (CGT) payable, including offsetting any loss made on the sale of a buy-to-let property in the same or a previous tax year against the gain.

As mentioned above, you may also be able to deduct allowable expenditure, such as solicitor’s fees, costs of advertising the property for sale, any Stamp Duty Land Tax (SDLT) payable, and expenditure incurred on property renovations to arrive at the taxable gain.

Furthermore, it might be possible to mitigate or defer CGT liability by reinvesting an amount equivalent to any gain made into a suitable tax-efficient investment vehicle.

Any tax owed on gains from UK residential properties must be reported and settled within 60 days of selling the property. These deadlines apply to individuals, trustees, and personal representatives of deceased individuals who dispose of residential property. They are responsible for self-assessing the calculation of the amount payable, considering their annual exemption and any losses.

The rate of CGT payable is determined after making a reasonable estimate of taxable income for the year.

For disposals by UK residents, the reporting and payment requirements do not apply if the gain on the disposal (or the total gain if more than one property is sold) is not subject to CGT. This may occur if the gain is covered by private residence relief, unused losses, or the annual exempt amount.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Income received from letting out a BTL property is subject to taxation and must be declared as part of your Self Assessment tax return. The tax on this income is determined based on the investor’s Income Tax banding, which is currently 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers.

You can potentially reduce the tax payable by deducting certain ‘allowable expenses,’ which typically include: interest on buy-to-let mortgages and other finance charges (though only at the basic rate); council tax; insurance; ground rent; property repairs and maintenance; legal, management, and other professional fees, such as those for a letting agent; and other property expenses, including building insurance premiums.

However, substantial improvements like extensions are not deductible for Income Tax purposes. Instead, they can be deducted from any capital gain on sale of the property.

Historically, it was possible for buy-to-let landlords to claim a ‘wear and tear allowance’, which allowed them to deduct 10% of the net rent from the rental income subject to tax to represent the replacement of furnishings etc. and therefore reduce their Income Tax liability on an annual basis. From 2016/17 onwards, the ‘wear and tear allowance’ was scrapped and you can only deduct expenses genuinely incurred on the replacement of qualifying expenditure which is likely to increase the landlord’s tax liability each year.

Impact of tax changes introduced from 6 April 2017

As mentioned above, the Finance (No. 2) Act 2015 introduced provisions that altered the deductibility of interest when calculating profits from rental property. These changes have been in effect since 6 April 2017 and gradually transitioned allowable deductions for finance costs to zero, with full implementation taking place from the tax year 2020/21 onwards. As of 2020/21, all financing costs incurred are eligible for only a basic rate tax credit.

At first glance, it may seem that basic rate taxpayers won’t face any additional tax burden under these rule changes. However, this isn’t necessarily the case, as these rules have altered the way that taxable income is calculated. For instance, consider an individual with rental income of £45,000 and employment income of £27,000, with mortgage interest totalling £30,000. Under the previous rules, the taxpayer would be deemed to have net income of £42,000 making them a basic rate taxpayer.  However, under the current rules, beginning in 2020, total income for tax purposes would be £72,000, which even after accounting for the personal allowance, would push the taxpayer into the higher rate tax bracket.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

When deciding whether it would be tax-advantageous to hold your properties within a limited company, various factors come into play, including the number of property holdings, rental income levels and the need for access to that income, leveraging on properties and the extent to which capital gains might need to be paid if a disposal of the properties was made.

Holding properties within a company structure may be tax-efficient where the portfolio is highly geared due to the fact that limited companies are unaffected by the mortgage interest relief restrictions discussed above. Instead, finance costs are considered a business expense and remain fully deductible against rental income before corporation tax. Rental profit accruing to a limited company (after deduction of finance costs and other allowable expenses) is subject to Corporation Tax, at a rate of 25% for profits exceeding £250,000. However, small companies with profits up to £50,000 are taxed at a rate of just 19%, while profits falling between these thresholds are subject to a tapered rate. This makes the tax rate considerably appealing compared to the rates of 40% and 45% for higher and additional rate taxpayers, respectively where rental income can be accumulated within the company or extracted tax-efficiently.

However, if the property investor is reliant on the property rental income, it’s essential to consider how it will be extracted from the company. If the profit needs to be extracted in the form of dividends, over and above the annual dividend allowance of £500, rates of 8.75%, 33.75%, and 39.35% for basic, higher, and additional rate taxpayers, respectively, will apply at shareholder level i.e. after Corporation Tax has been paid – giving rise to an element of double taxation If the property works in the business, taking money as a salary will avoid this issue (as salary is a deductible expense for Corporation Tax purposes) but paying salary entails operating PAYE and paying employers’ National Insurance contributions, which may result in higher overall costs.

Furthermore, transferring an existing buy-to-let property into a limited company can pose practical challenges, especially if there’s an existing mortgage. Many lenders ask for a personal guarantee for a mortgage – in which case, the shareholder(s) who give the guarantee will be personally liable for the debt, if the mortgage repayments are not maintained. Alternatively, the property may need to be remortgaged with the company taking a corporate mortgage. Transferring existing buy-to-let property to a company can also trigger Stamp Duty Land Tax and Capital Gains Tax charges at the time of transfer. While planning can mitigate such liabilities in certain circumstances, seeking professional advice before pursuing the limited company route is imperative to determine whether these mitigation opportunities will be viable in any specific case.

Your home may be repossessed if you do not keep up repayments on your mortgage.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

If a guarantor is needed we recommend they get legal advice to ensure they fully understand their obligations regarding the mortgage.