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What You Need To Know About Property Taxes

As a property investor and owner, you’ll have to consider your ownership structure. Whichever you choose, there will be tax obligations to HMRC.

A lot of landlords ask us whether they should run their properties as a limited company or under personal ownership.

If you want to ensure you’re as tax-efficient as possible, this article will explain what you need to know about property taxes.

Limited company v personal ownership

As mentioned, you’ll be taxed different dependent on whether your properties are run personally or through a limited company.

Personally owned properties will be taxed in a very straightforward way. You’ll have to deduct your allowable expenses from your rental income to determine your profit.

Annually, you’ll have a tax-free £1,000 from your rental income, so you’ll need to consider this when working out your tax obligations.

On personally owned properties, you’ll receive a basic rate reduction from your tax liability for any mortgage interest payments and other financing costs.

Properties owned by a limited company can afford to be a bit more flexible as mortgage interest payments are tax allowable and will reduce the profit, therefore, lowering the amount of payable tax.

You’ll then pay corporation tax rather than income tax on your profits. Also, in a limited company, you can be tax-efficient with your personal taxes by paying yourself with a mix of salary and dividends.

Transferring property into a company

Although you may think transferring property from your personal portfolio into your company’s will be tax-efficient, you may find you’ll pay additional taxes.

This is because it will be seen as you selling a property to the company in the eyes of HMRC.

If you do transfer your property into a limited company, the company may have to pay stamp duty. Not only that, but you may need to pay the 28% capital gains tax (CGT) rate depending on the original buying price and the sale price.

Once the property is owned by the limited company, any assets and the property itself will be liable for any losses the company incurs. Also, if you decide later to sell the property, the company will pay corporation tax on the profits.

Higher rate tax

Property owners who earn enough to be in the higher rate of taxpayers will inevitably have to pay more property tax too.

As mentioned, if you sell a property which isn’t your main home, your profits will be subject to CGT, and if you’re a higher earner, you will have to pay 28% on anything over your annual allowance.

If you’re a higher earner and also a landlord, you will be liable to pay 40%-45% of your income depending on whether you hit the additional rate threshold of over £150,000 a year.

Stamp duty land tax

Previously, when buying a home for yourself, you wouldn’t have to pay any tax on the first £125,000 of the price. This has now changed, and anyone buying a house worth up to £250,000 will not need to pay any stamp duty land tax (SDLT). For a first-time buyer, this threshold will be higher at £425,000.
This applies to England and Northern Ireland. Both Wales and Scotland pay land transaction tax (LTT) instead.
You will have to pay an extra percentage of SDLT depending on the value of the property and whether it’s your main residence or not.

Purchase price Main residence rate Additional property rate
Up to £250k (£425k first time buyers) 0% 3%
£250,001 -£925,000 5% 8%
£925,001 – £1.5m 10% 13%
£1,500,001 + 12% 15%

 

Know what you owe

When it comes to HMRC and property tax, it’s important to get everything right. The team at Durrani & Co is here to help you on any matters relating to your property tax.

Get in touch with our team today.