Investing in property: The tax implications 

When it comes to making investments, property can be a great option. With the prospect of large returns, under the right circumstances, properties can be a great way of increasing your monthly income. 

Whether you are investing in property as a buy-to-let landlord or acquiring a holiday home rental, you must be aware of the tax implications that could affect your profits. 

If you do not ensure compliance, you could face fines from HMRC. 

Buy-to-let 

For many, buy-to-let properties can be a good way to earn extra income. It doesn’t matter if you own a single property or a portfolio, as the tax will be applied the same. 

The main taxes that apply to buy-to-lets are: 

  • Income Tax: Your profits following expenses, such as the mortgage and maintenance, will be taxed at your marginal rate. 
  • Capital Gains Tax (CGT): This will apply if you sell your buy-to-let property at a higher price than when you bought it and will be charged on your profits. 
  • Inheritance Tax (IHT): If you are to pass away, your beneficiaries will be responsible for paying Inheritance Tax on the buy-to-let properties that they inherit. 

There are several ways you can minimise the impact of tax on your buy-to-let property investments. An accountant can help you take advantage of these. 

Some options are: 

  • Joint ownership of property, meaning that Income Tax can be shared 
  • If you have a large portfolio held by a limited company, you can take advantage of Business Asset Disposal Relief if you choose to sell properties 
  • You can gift your property to descendants, but this must be a minimum of 7 years before you pass to qualify for IHT exemption. 

As well as the above, one option to consider is incorporating a property portfolio into a limited company. 

Owning your portfolio through a company, rather than personally, can offer significant tax reliefs – including the ability to claim a 100 per cent relief on mortgage interest payments.  

Rather than paying Income Tax or CGT on your profits and gains, you will also be charged Corporation Tax instead. This is typically a lower rate, meaning you get to retain more of your profits. 

There are obstacles to doing this, however, that may outweigh the benefits: 

  • When transferring your properties to a company, you may be charged CGT at the same rate as if you had sold the property at market value 
  • The company may also have to pay Stamp Duty Land Tax (SDLT) on the property. 

Holiday rentals 

If you are looking for an alternative to buy-to-let property, then investing in a holiday rental is a good option. 

Unlike buy-to-lets, holiday rentals can be treated as business assets, so long as they are: 

  • Available to let for at least 210 days a year 
  • Let for 105 days per year, with no stays for more than 31 consecutive days 

However, the tax implications are almost identical to buy-to-lets. If you own a holiday rental, the taxes that could apply to you are: 

  • Income Tax 
  • Capital Gains Tax  
  • Inheritance Tax  

Despite these similarities, holiday rentals are entitled to other forms of relief. This can help you to reduce your tax bill and maximise your share of the profits.  

Some of the reliefs include: 

  • Business Asset Disposal Relief: This would reduce the amount of CGT you would have to pay should you sell your property for a profit. 
  • 100 per cent Business Relief: This means you may be able to have your holiday rental qualify for an exemption for IHT. 

Whilst these are appealing, you must ensure that you qualify. If you try to use benefits you are not eligible for, you could face investigations from HM Revenue & Customs. 

For best practice, it is best to embark on tax planning for your property investment with a qualified accountant.  

If you would like further advice on tax compliance for your investment properties, get in touch with our team today! 

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