Is UK Property A Good Investment for Taxation?

Once settled into Cyprus many have lump sum capital that they are looking to invest and often they are drawn to purchasing physical back in their UK homeland.

Often naivety can play its part and many of pitfalls and additional costs are not considered. In this month’s informative article we consider some of the UK tax facts that affect property purchases back in the UK. Sometimes it is very much easier not to think of the drawbacks to gross income.

Many Brits are brought up believing it is aspirational to own property; that an ‘Englishman’s house is his Castle’. Whilst UK residential property (buy to let) is much loved, it’s clear that successive UK Governments have decided that they can increase the UK tax take, at the private landlord’s expense.

Here we highlight a number of the recent UK legal changes and some of these changes will apply to every private landlord.

Effective 2016, those purchasing a property (or part of one) in addition to any already owned for £40,000 or more are subject to an extra 3% SDLT. This took the top slice for values above £1.5m to 15%

Similarly effective, but in 2021, a further 2% applies to an overseas buyer. This means that an overseas buyer purchasing and additional property in the UK (even if none are owned in the UK before the purchase in the UK, only overseas) a staggering extra 5% applies.

From April 2017, the mortgage interest tax relief landlords could claim has been phased out for Higher Rate Taxpayers (HRT), a move that has hit some landlords with mortgaged properties very significantly. A new system, equivalent only to Basic Rate Tax (BRT) relief remains.

In April 2016 the automatic ‘Wear and Tear’ 10% allowance was removed. This was replaced by the ‘Renewals Allowance’ applying only for fully furnished properties and the actual cost of replacing furnishings, furniture and fixtures, on a like-for-like basis, a far less valuable allowance for most landlords in most years.

From April 2017, non-domiciles who had been well advised to purchase UK residential property through offshore companies to forestall IHT on them were brought into the UK IHT net, including those structures set up before that date.

Since April 2015, non-residents disposing of UK residential property have been subject to UK Capital Gains Tax (CGT) from that date, irrespective of leaving the UK. The previous position still applies to UK shares and funds, that non-residents continue not to pay UK CGT.

Similar to the above, since April 2016 there are different tax rates when it comes to capital gains tax on residential property compared to shares and mutual funds. Shares and mutual funds are subject to capital gains tax at 10 or 20%, whilst property suffers significantly higher rates of 18 and 28%.

Stamp duty land tax (SDLT) changed from ”slab’ to ‘slice’ in 2014. Whilst this removed the cliff edges in terms of % paid on purchases, the incoming system reduced or left unchanged SDLT for residential properties from £125,000 to £935,000 but raised it for properties above £935,000.

Lettings relief of up to £40,000 per owner (i.e. £80,000 per couple) was available where a property had been rented out at some point during the period of ownership (but not for the whole period) until April 2016. This remains available, but only where the owner of the property has been living at the property with their tenant. This means that lettings relief has effectively been abolished for most landlords.

Final years relief, an exemption from CGT for the last 36 months of ownership even where the owner has not occupied the property during this period, has been watered down twice, first to 18 months and from April 2016 to just 9 months.

Of course don’t forget you still need to complete a UK Non Resident Landlord tax return every year that you own UK property.

Finally, from an investment principles perspective, poor liquidity and no diversification should not be ignored. Liquidity issues with properties are well known. As inflation and interest rates rise, the cost of finance may also negatively impact overall returns. Mortgage interest rates are only going upwards at the present time and that is of course if you can secure a non UK resident mortgage – more on this another time.

And for those with an eye on IHT, residential property is the most difficult asset to plan with. Holding out on a sale until death may alleviate an 18 or 28% charge on profit, but expose the full value to IHT at 40%. Those overweight on property, and tax savvy, will recognise the tax advantage of selling with an 18 or 28% liability on a smaller gain earlier, in order to plan for IHT, to potentially remove a 40% liability on the full value upon death.

A well-diversified and professionally overseen portfolio of equity, fixed interest, liquid property investment funds and alternatives, can meet many investors post tax investment return objectives.

Investments and the income from them can go down as well as up, you may not get back what you invest.

This document should not be considered financial or tax advice and states publicly available UK tax information. It is based on our current understanding and interpretation of publicly available information and is therefore subject to change. It is intended as general guidance only.

Lee Hinton is an Associate Member of the Chartered Institute of Securities and Investments, holds the Cyprus Ministry of Finance Advanced Examination certificate and holds the UK Diploma in Financial Planning.

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