How can you ensure your property investment is executed in the most tax-efficient manner? 

Property investment can be an exciting and satisfying way to grow your wealth. It has the potential to provide a steady income, along with capital growth; it's also an essential option for creating a diverse investment portfolio. 

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Property investment can be an exciting and satisfying way to grow your wealth. It has the potential to provide a steady income and capital growth; it's also an essential option for creating a diverse investment portfolio. BSR Bespoke Chartered Accountants can help ensure your property investment is executed in the most tax-efficient way.

From renting out your spare room or purchasing a buy-to-let to putting cash into a real estate investment trust or building a commercial property empire, there are myriad ways to invest in commercial and residential property. Choosing one or the other (or both) is ultimately a personal preference. Each has advantages and disadvantages, but all have one thing in common: tax implications. Understanding these is essential.

At BSR Bespoke in Tunbridge Wells, our property tax experts can advise you on handling your current property investments in the most tax-efficient way and/or tax-efficient ways to invest in new acquisitions. Getting to grips with the different taxes that apply when investing in and owning UK property can help you make the most out of your property while also making sure that you are compliant with all relevant laws.  

What taxes are payable on residential and commercial property?  

There are different tax implications for each type of investment. Property investors in the UK are liable for different taxes, depending on their circumstances.

Stamp Duty Land Tax (SDLT) is payable when you purchase a residential or commercial property.  For residential properties, the rates change depending on whether you are a first-time buyer or will end up owning more than one residential property – known as the 3% additional property surcharge.  If you are a non-resident, you also have a non-resident surcharge of 2%.

Companies must always pay the additional property surcharge when purchasing residential property. There is also a top rate of 15% for properties worth over £500,000 if certain conditions are not met (such as not being used within a rental business). Companies owning UK residential property worth over £500,000 may also be required to report and pay the ATED charge (Annual Tax on Enveloped Dwellings).

When renting out a property, individuals will pay income tax on their rental profits and companies, corporation tax.  Individuals can claim the HMRC £1,000 property allowance, although this would be instead of actual expenses incurred, so it is for those individuals who have minimal costs when renting their property.  Individuals can also claim rent-a-room relief, subject to certain conditions.

If the time comes to sell, residential and commercial property owners must also pay capital gains tax on any gains from their properties.  A 60-day CGT return is also required for individual residential property owners if tax is due.

BSR Bespoke can assist with filing all the required returns and reports, as well as providing expert advice on all reliefs and exemptions that apply to your particular circumstances.

How do I make use of tax reliefs and allowances?  

There are a range of tax reliefs and allowances that can help reduce the tax you have to pay on property investments, with different rules impacting relief for expenses, finance costs and capital improvements.  These rules also differ between residential and commercial property, as well as whether the property is owned individually or within a company.

An example is finance costs, where if an individual owns a buy-to-let residential property, mortgage interest cannot be deducted from rental profits. Instead, relief is given at 20% against the individual's tax liability.  The rules change again if the residential property qualifies as a furnished holiday let (FHL).

Is it better to own property personally or within a company or a trust?  

Regarding property ownership, each option has its own advantages and disadvantages. In some cases, owning the property personally may be more beneficial regarding tax efficiency. However, setting up a company may be the better option if you are looking for asset protection or flexibility in ownership structure. In some circumstances, exploring using a trust to hold the property may be more beneficial.  BSR Bespoke will be able to advise you on the best route based on your specific circumstances and requirements.

Helping you to invest in property in the most tax-efficient way 

BSR Bespoke has years of experience in the commercial and residential property sectors. Our team of qualified advisors will provide you with tailored advice and guidance on all the tax aspects of property investment, including which ownership structure is right for you, how to make use of tax reliefs and allowances, as well as helping you to understand the different taxes that apply to property investments in the UK.

Property Investment Case Study 

Martha (not her real name), who works in PR, has saved a lump sum that she wishes to invest in buy-to-let property in her home town of Brighton. She aims to diversify her income and supplement her pension when she retires.  

We reviewed her overall financial situation and future goals and advised that setting up a company with Martha as the director and shareholder would be more tax-efficient.  As a higher-rate taxpayer herself, this meant that profits earned from the rentals would be taxed at lower rates within the company and then either remain available to be drawn from when she retired or used to reinvest in further property acquisitions in the future. 

As the property cost under £500,000 and would have been classed as an additional property for Martha if she bought it individually, the stamp duty position was similar between herself and the company.  The mortgage rate was slightly higher, but when considering the overall anticipated costs, personal tax thresholds and flexibility that a company can bring, there were more significant long-term benefits.

Whether you are an experienced property investor or a beginner, our team of experienced property tax advisors at BSR Bespoke can provide tailored advice to help you make the most of your property portfolio. Don't hesitate to get in touch with us for an initial consultation.