Buying a property is a daunting and sometimes confusing area, and an issue that is right at the top of the expat buyer’s mind is the question of tax implications. In this article we’re going to review the implications of both tax and stamp duty and how these affect the purchase.
Essentially, the implications of tax are quite straightforward. Each person in the UK has a personal allowance of £11,500 per year for their income before they have to pay tax to the Inland Revenue. Since mortgage costs can be deducted, this means that you would need to be the landlord of a number of properties before you reach this threshold.
What’s more, this tax allowance rises every year - the average rise is £300, which is above the rate of inflation, so you won’t find it encroaches on you over the years. In fact, your annual tax free allowance will increase.
There are ways to mitigate this – married couples or civil partners are able to combine their tax allowances to make a total of £23,000 per year. Non-resident landlords can apply to join the NLRS (non-resident landlord scheme), which ensures that tax is not withheld at source.
For expatriate investors, tax should be declared on the tax return if necessary and returned.
While this is the legal situation with the British tax authorities, naturally your country of residence may also apply its own tax requirements, so that needs to be verified with a tax professional in that country. Some countries, such as Switzerland for example, tax individuals on their worldwide income.
SDLT – Stamp duty land tax
When you purchase your property, there may be a stamp duty tax to pay. This is a one off payment that varies according to a few factors: the cost of the purchase and whether it’s a first home or a second home.
For first time buyers, the following charges apply:
First £125k is tax free.
£125-250k purchase price is taxed at 2%
£250-925k purchase price is taxed at 5%
For second home owners (or above), which applies to many of our clients, the following charges apply:
£0-125k is taxed at 3%
£125-250k at 5%
£250-925k at 8
Here’s a handy calculator to help you identify exactly the amount you’ll have to pay.
So is it better to own lots of little properties? Or one larger?
Investors sometimes wonder if it is more tax efficient to buy larger properties or smaller ones. Here’s a scenario:
If you buy one large property at £550,000, Stamp Duty is at 8% which results in a bill of £44,000. At a yield of 4% this gives income of GBP22,000 per annum.
If you buy five smaller properties at £100,000, Stamp Duty is at 3%, resulting in a bill of GBP15,000. At a yield of 7% this gives income of £35,000.
Purchasing the five smaller properties therefore reduces your Stamp Duty bill by £29,000 and increases your income by £13,000.
Own as individual or company?
This is one solution that investors sometimes consider – buying through a shell company. While this is totally legal, the effect on your tax burden depends on the situation.
Factors which affect this are the number of properties you acquire, whether you are leveraging on existing properties and your current tax bracket.
An additional point would be the question of domicile: buying via a company would maintain you at ‘arm’s length’ from the UK, and you would potentially avoid domicility issues. This article outlines the pros and cons, and when you should consider ownership via a company.
Still a worthwhile investment
Fortunately, tax matters in the UK are genuinely transparent and easy to understand. In fact, the country’s premium property market is built on solid foundations of good governance, attractive tax demands and transparency, meaning investors have little to worry about in this regard.