Do you own a home? Do you have a Buy to Let or other real estate investments? Owning property can bring many benefits, such as freedom from needing to pay rent in retirement (when your mortgage is paid off) and enjoying additional income streams from tenants in additional properties. However, property can be especially complex when it comes to tax planning.
Property tax mistakes can be very costly. To avoid needless mistakes, it helps to understand the broad tax landscape and seek financial advice. Below, our Teesside financial advisers identify four key property taxes to know about in 2024.
We hope these insights are helpful. Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137`
e: [email protected]
#1 Income tax
If you live in a house or flat and have no tenants, you likely do not need to worry about Income Tax regarding your property. One exception is when you have a lodger. You can earn up to £7,500 per tax year, tax-free, under the Rent a Room Scheme.
If you have a Buy to Let property or other rent-generating properties, Income Tax can be very important. In 2024-25, you can earn up to £1,000 from rent without paying tax (although you cannot claim a deduction from your expenses).
This aside, any income from additional properties (e.g. Buy to Lets) will be classed as income under your Income Tax liability. As such, up to £12,570 of an individual’s total income (including salary, rent and other income) is tax-free in 2024-25.
After that, the individual’s marginal rate applies. For instance, if the individual’s total income is below £50,270 for the tax year, then the 20% Basic Rate applies.
#2 Capital Gain Tax (CGT)
If you sell your residential home for a profit, CGT does not typically apply unless you fall through some specific loopholes (e.g., you were letting out your home while living overseas). This is known as Main Residence Relief.
However, CGT will likely be due if you sell an additional property for a profit. In 2024-25, a CGT-free allowance of £3,000 is available (the Annual Exempt Amount), which can reduce the bill. However, this may not cover the full capital gain if the property has increased significantly.
One option to mitigate CGT on an additional property is to consider putting it into “joint ownership” with your spouse or civil partner. This can allow the couple to “combine” their Annual Exempt Amounts to a total CGT exemption of £6,000 in 2024-25.
#3 Stamp Duty Land Tax (SDLT)
SDLT can be a tricky property tax to navigate. It can apply when a buyer purchases a UK property, with the rate largely depending on its value and “type”, as well as if the property that is being purchased will be the buyers only property, or would be an additional property.
For instance, no SDLT is due when purchasing a property worth under £250,000. For first-time buyers, SDLT is only due on properties worth over £425,000. Above these rates, SDLT is charged in tiers with higher valued properties being charged progressively higher rates of SDLT.
Stamp Duty rules are different for property investors or people looking to purchase a holiday home. In this scenario, reliefs are lower, and an additional 3% is charged on top of existing rates. The amount of SDLT that will be payable is an important consideration if you are purchasing a second property.
#4 Inheritance tax (IHT)
When you die, your property may be subject to IHT without careful financial planning. In 2024-25, IHT is levied typically at 40% on the value of an individual’s estate once the total assets exceed £325,000. This is called the Nil Rate Band (NRB).
Fortunately, there are rules in the UK tax system which can be used to optimise an estate plan. One of these is the Residence Nil Rate Band (RNRB). Here, an individual can “extend” their NRB by £175,000 if they leave their main home to “direct descendants” when they die.
If the individual is married or in a civil partnership, the spouses/partners can “combine” these allowances to potentially pass down a £1m estate without IHT (including the family home).
Things get more complex regarding additional properties like Buy to Let. These properties do not have access to the RNRB. For instance, an additional property worth £500,000 when the owner dies would breach the NRB, leaving £175,000 subject to IHT.
There are certain options that may be available to additional property owners to mitigate a needless IHT liability. Seek financial advice to explore these with the best information.
Invitation
With a tax-efficient plan, it is possible to protect your home and property investments and maximise their utility for your financial goals. In today’s ever-shifting tax landscape, it is important to have your ear to the ground and adapt when circumstances require.
This is where working with a financial planner can help. If you would like to discuss your financial plan with us, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.