UK property investment remains one of the best opportunities to start building wealth – either through consistent passive income or generating a substantial return on investment when you sell the property.
At a time when geopolitics continues to rock the global stock market, the resilience of UK property has been pulled into sharp focus and highlighted exactly why this asset class is so popular with domestic and foreign investors.
If you’re investing, understanding the tax landscape is vital for maximising returns and ensuring financial stability. With several changes coming into effect this month and the start of a new tax year, we’re outlining the key property taxes you can expect to pay if you’re investing in residential property.
What are the Key UK Property Taxes?
Below, we’ve established the most important UK property taxes you’ll need to pay when you invest in a property – with different breakdowns depending on your circumstances:
Stamp Duty Land Tax (SDLT)
Arguably, the most well-known compulsory tax is Stamp Duty Land Tax, which is a progressive tax that applies whenever you buy a property in either England or Northern Ireland
The amount of tax you pay changes based on the value of your property, with increasing thresholds of tax as the property value rises. Likewise, you may pay more if you’re purchasing a second home or an investment property.
Important: When you buy an additional property (i.e you already own a home in the UK and you buy one for investment), you automatically pay an additional surcharge of 5%, which is why the rates above are higher than the base rates.
It’s important to remember that stamp duty taxes work in a similar way to income tax. You only pay the rate on the proportion of the property that goes across the relevant threshold.
For example, if you purchase a residential property for investment worth £250,000, you’ll pay SDLT on the following:
1. First £125,000: 5% (0% + 5% additional rate)
2. Next £125,000: 7% (2% + 5% additional rate)
This would amount to £15,000 – an effective SDLT rate of 6%.
Important: If you’re buying from overseas, there’s an additional 2% SDLT surcharge, which would mean the following applies:
Capital Gains Tax (CGT) is slightly different to the other taxes in that it applies when you sell a property. It only applies to the profit – how much you sell the property for compared to the original purchase price.
The amount of Capital Gains Tax you pay may also change based on the tax band you’re in. For example:
If you’re a basic rate taxpayer, the amount of CGT you pay is 18%.
If you’re a higher or additional rate taxpayer, the amount of CGT you pay is 24%.
If you’re a basic rate taxpayer but then the gain pushes you into the higher rate band, you pay CGT on both rates.
Income Tax
Any rental income you receive from a property applies to your income tax at your marginal rate. However, there may be allowable expenses you can deduct that reduce your exposure.
For example, imagine you earn £17,000 from a rental property and your salary is £35,000. This means your total income is £52,000, and a portion of your income is taxed at the higher rate of 40%.
However, you’re also able to deduct certain expenses, including things like letting agent fees and maintenance costs. Now, imagine you reduce your taxable rental income to £13,000. This means the entirety of your income comes under the basic tax rate, and you’re reducing your tax liability significantly.
Inheritance Tax
It’s important to note that inheritance tax (IHT) is charged on any of your assets at 40% over the nil rate band, which is £325,000.
This has been in place since 2009, and it’s expected to remain at this level until 2028.
There is very limited tax relief in place when it comes to inheritance tax and investment property, although savvy investors may minimise the amount they pay by gifting assets or even moving assets into a business.
