Mastering UK Property Taxes: Top Tax Hacks for 2024

Dear Readers

Having now been involved in UK property investment for almost two decades, I understand the importance of maximizing your property investment returns.

One key aspect of this is managing your tax liabilities effectively. In this blog, I'll share some tax hacks for UK property investment that can help you legally minimize the tax you pay, putting more money in your pocket.

Tax Basics:

Let's start with the basics. There are several taxes you need to consider when investing in property, including income tax, corporation tax, capital gains tax, and inheritance tax.

Income Tax on Property:

Income tax is based on what you earn in the UK. For the current tax year, the first ￡12,570 of your income is tax-free. Beyond that, you enter the 20% tax bracket, then 40% if your income goes above ￡50,270. It's important to keep track of these thresholds, as taxes change regularly. You can check the latest thresholds on the HMRC website.

Calculating Your Income Tax:

To understand how income tax works, let's consider an example. Imagine you earn ￡60,000 a year from your job and an additional ￡10,000 from rental income, bringing your total income to ￡70,000.

For the current tax year, the first ￡12,570 of your income is tax-free. This is known as the personal allowance. The next portion of your income, between ￡12,570 and ￡50,270, is taxed at a rate of 20%. So, for this example, you would pay 20% tax on ￡37,700 (￡50,270–￡12,570) of your income.

Next, any income above ￡50,270 is taxed at a higher rate of 40%. In this case, your total income exceeds ￡50,270 by ￡19,730 (￡70,000 minus ￡50,270), so you would pay 40% tax on this amount.

Therefore, your total income tax for the year would be calculated as follows:

- ￡12,570 taxed at 0% = ￡0

- ￡37,700 taxed at 20% = ￡7,540

- ￡19,730 taxed at 40% = ￡7,892

Adding these together, your total income tax liability would be ￡7,540 + ￡7,892 = ￡15,432.

It's important to note that tax rates and thresholds can change, so it's always a good idea to check the latest information on the HMRC website or consult with a tax professional for personalized advice.

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Income Tax Strategies:

One way to reduce income tax is to consider your partner's tax rate. For example, if you are in a higher tax bracket than your spouse, buying a property together and specifying who has beneficial ownership can potentially lower your tax rate. However, be cautious, as this strategy could push your partner into a higher tax bracket if you own one or two properties.

Setting up a UK Ltd. company for tax efficiency:

When it comes to taxes, landlords need to be aware of various factors that can impact their profits. One key aspect is corporation tax. If you have a limited company, your profits are taxed at 25%, which can be beneficial if you're a higher-rate taxpayer. For example, if your property generates ￡20,000 in profit, as a higher-rate taxpayer, you'd pay 40% income tax on this profit. However, if the property is owned by a limited company, the tax would be 25%, potentially saving you money.

Another important change is Section 24, introduced in April 2017, which affects how landlords are taxed. Higher-rate taxpayers can no longer offset mortgage interest against profits. This change has led many investors to consider investing through a company structure, as all of the interest can be offset against rental income to reduce the taxable profit.

For example, if your mortgage interest is ￡5,000 per year, losing the ability to offset this against rental income could significantly increase your tax bill, making a company structure more attractive.

It's also worth noting that a loophole allowing mortgage interest offsetting for serviced accommodation or furnished holiday lets in personal names was closed by the Chancellor during the Spring Budget 2024. This, coupled with significant capital growth in recent years, has led many landlords to sell their properties to realize profits.

Understanding these tax implications is crucial for landlords to make informed decisions about their investments.

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Understanding Capital Gains Tax for Property Investors

For property investors, Capital Gains Tax (CGT) is an important consideration when buying and selling properties that are not their primary residence. In the UK, CGT is currently set at 24% of the profit you make from property sales.

Property values in the UK have often seen significant increases due to the growing population and housing supply shortages. However, property markets are cyclical, so values can fluctuate.

If you buy a property and sell it after a certain period, typically 10 years, CGT is calculated based on the difference between the purchase and sale prices. To reduce the tax burden, you can offset buying and selling costs, as well as any capital improvements made to the property.

For example, if you bought a property for ￡200,000 and sold it for ￡250,000, making a ￡50,000 profit, but spent ￡5,000 on buying and selling costs and ￡10,000 on improvements, you'd only pay CGT on the ￡35,000 profit.

On a positive note, recent changes announced in the spring budget have reduced CGT from 28% to 24%.

One strategy to reduce CGT is to live in the property, as CGT is not applicable to primary residences. Some investors also buy older properties, renovate them, and reinvest the profits into their next project.

Additionally, repair costs such as replacing a kitchen can be offset against rental income, improving the property and reducing taxes simultaneously.

It's important to note that CGT is only payable upon the sale of a property. If you hold onto the property, you will not incur CGT. However, the implications of CGT upon death are worth considering for long-term planning.

Understanding Double Taxation Treaties for Non-Residents of the UK

Double Taxation Treaties (DTTs) are agreements between two countries to prevent taxpayers from being taxed twice on the same income. They ensure that income is taxed in one country (either the country where the income is earned or the country of residence of the taxpayer), rather than being taxed twice.

DTTs often include provisions for tax relief, such as tax credits or exemptions, to mitigate the impact of double taxation. These treaties help promote cross-border trade and investment with the UK by providing certainty and fairness in tax treatment.

Investors should be aware of DTTs when investing in the UK to understand their tax obligations and take advantage of any available tax relief mechanisms.

Some countries treaties may differ, so we recommend speaking to a tax specialist for this purpose.

Understanding Inheritance Tax and how to protect your Estate

When building a property portfolio, it's crucial to consider Inheritance Tax (IHT) if you have significant assets. Proper estate planning can help you pass on wealth tax-efficiently to future generations, making it advisable to seek advice when embarking on this journey.

For instance, having life insurance in your own name may result in the insurance payout being taxed at 40% if you're the beneficiary. Setting up a separate family trust and placing the insurance through the trust can allow beneficiaries to borrow money from the trust to clear debts without facing the 40% tax.

Here's an example to illustrate: if your estate is valued at ￡1 million and your tax-free threshold is ￡325,000, the remaining ￡675,000 would be taxed at 40%. Proper planning and advice can help reduce this tax burden.

Some investors fall into the trap of focusing on costs rather than value when it comes to property investment. Working with experts, including accountants, can be a wise investment as they can help optimize your tax returns and potentially save you money in the long run.

Similar to estate planning, having a good financial advisor can help you navigate the complexities of tax-efficient structures and strategies.

In summary, consider these key points:

1. Place properties in partners or children's names.

2. Consider buying property through a company structure instead of personally.

3. Offset capital improvements and buying costs against capital gains tax.

4. Set up a trust structure for estate and inheritance planning to avoid or reduce IHT liabilities.

5. Operate your property like a business through a limited company to offset expenses such as mortgage interest relief, improvements, and refurbishments against profits to reduce your tax liability.

In conclusion, understanding these tax considerations can help you maximize profits and build a successful property portfolio.

If you'd like to speak to a tax specialist about your property investments, feel free to get in touch with us at Fabrik Property Group . We have assembled a team of experts who can help you achieve your investment goals.

*Remember, this is general guidance and education and not to be considered financial advice, and it's important to consult with a qualified tax specialist and professionals for personalized advice.

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Warm regards,

Dale Anderson

Managing Director

Fabrik Invest Ltd

https://fabrikinvest.com/