The tax implications of adding an investment property to your wealth

Buying and living in your own home, it is unlikely you will ever have to pay any type of tax, other than VAT on purchases or home improvements you make. 
However, when making money from property, there will be a whole host of new taxes to consider and, it is important to understand these prior to investing to let. 
Here are some of the tax implications to consider when adding property to your wealth portfolio:

Income Tax
Rental income from investment property is taxed in the same way as money you earn from working.

If you do not currently have an income, bear in mind that if the rental profit exceeds the personal tax allowance you can claim, you may have to pay tax on that excess amount.

Similarly, if you are currently a lower-rate taxpayer, the additional rent may push you into a higher tax bracket. As tax is, in the main, unavoidable, it is important to know how much you may be liable for before you buy an investment property, and that you put money aside each month so that you do not struggle to pay a tax bill at the end of the year. 

For more information on the Personal Allowance and Income Tax thresholds, please visit here. 

Capital Gains Tax 
Any property you own that is not your own home may be liable for Capital Gains Tax (CGT).

This means that when you sell the property, you may owe tax on any capital growth over and above the individual tax-free allowance – £11,100 for 2015/16.

If you purchase a property for £100,000 and sell it for £200,000, you will have made, in the eyes of HMRC, a capital gain of £100,000.
This £100,000 increase will have some tax-deductible elements, such as any major improvements made to the property, and you can then deduct the personal allowance.

You will owe tax on the remainder, at a rate of 18 per cent for basic-rate taxpayers and 28 per cent if you are in the higher-rate bracket.

Also be aware that CGT-allowable deductions and expenses, as well as the personal allowance and other taxes, can change with every budget or whenever a new government comes to power.

Visit here to make sure you stay up-to-date with the latest rates.

Reduction in Benefits
When your income and the assets you own increase in value, you may lose the benefits you have been receiving.

For example, if you have children, and you or your partner has an individual income of over £50,000, you are likely to have to pay tax on the Child Benefit you receive, and if your income is £60,000 or more, it is likely that you will lose that benefit altogether

So, if you currently earn £49,000, the rental income of the property you are considering buying is £11,000 and you have a partner who is currently earning below £39,000, it may be worth considering putting the property in their name.  

Carrying out some tax planning prior to investing in property will help make sure you keep more of the money you earn and although our specialist brokers are trained in mortgage advice, they do understand that there are wider implications that adding additional property to your wealth can bring.    

To find out more, please contact one of our specialist buy-to- let advisers.

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