Tax on property
Where will you buy your first home?
More than 120,000 first-time buyers in England and Northern Ireland have taken advantage of a stamp duty holiday in the past year.
In autumn 2017 the Chancellor announced he was abolishing stamp duty for first-time buyers purchasing homes worth £300,000 or less and applying a reduced rate of 5% above that up to a maximum purchase figure of £500,000, a move that helped 121,500 people get a foot on the property ladder between then and June 2018.
A similar scheme is currently operating in Scotland, where buyers are charged a Land and Buildings Transaction Tax. The tax free threshold is extended for first-time buyers, giving them extra help to take that leap from generation rent to generation buy.
In Wales, the Land Transaction Tax is charged on all properties over £180,000, this threshold being higher than it is elsewhere in the UK. However, there is no additional grace for first-time buyers as it is assumed, with houses being more affordable in Wales, that first homes will always be below this level.
In addition to the tax payable on purchase, Capital Gains Tax applies to profit made from the sale of property. While primary residences are protected, the charge will be made on the sale of, for instance, a holiday home or a property bought for rental purposes.
For 2018/19 there is an £11,700 annual exemption for CGT. After that the level you pay is dictated by how much you earn from other sources and which tax band you fall into.
Basic-rate taxpayers in England will pay 18% while higher earners will pay 28% and although there are five income tax bands in Scotland, the same rates and thresholds apply.
We have previously looked at income tax due on the profits made from letting property and, in light of the recent changes to mortgage interest relief; it is worth remembering that your income from property has the potential to nudge you into a higher income tax band.
Landlords were able to offset their entire mortgage interest against rental profits before April 2017 but now the government is phasing this out and replacing it with a phased in tax credit at the basic rate of tax of 20%.
In 2017/18, it was possible to deduct 75% of your mortgage interest. This went down to 50% in 2018/19 and will hit 25% in 2019/20, before being eliminated altogether by 2020/21.
As an example, Sharon earns £38,000 a year as an employee and is a basic rate taxpayer. She has a buy-to-let property, which she rents out for £11,400 in 2017/18. The interest on her mortgage was £3,240 but she was only able to deduct 75% of this from the net profit – a figure of £2,430.
This means her profit from the rental property is £8,970, pushing her into the higher-rate tax band. And over the next few years, the proportion of her rental income which is subject to 40% tax charge will increase, meaning she is worse off.
There is a way to improve her position, by renting her property through a limited company where loan interest remains a deductible expense against rental income. Planning is necessary if this is being considered as there are other costs associated with running a limited company.
If you need help with this issue, contact us and speak to one of our chartered tax advisers.