TAX GUIDE – INVESTING INDIVIDUALLY IN UK PROPERTY FOR RENTAL PURPOSES
*The following information should not be taken as a substitute for specific advice tailored for your requirements. Each individual’s circumstances are different and professional advice should be sought in your country of residence. The following information has been provided by Atul Mehta, partner at Simmons Gainford Group.
General principles – Income Tax
Whether an individual is UK tax resident or not, they will generally still be subject to income tax in the UK on net rental profits arising within the UK. In considering the net profit, the relevant gross income for the tax year (6 April to 5 April) is calculated, from which all allowable expenditure can be deducted. Typically, (but not exhaustively) such expenses may take the following forms:
- Agents Commission
- Management Fees
- Ground Rent
- Loan Interest (however see loan interest restrictions detailed below)
- Service Charges
- Certain Professional Fees
It is important to keep accurate records regarding all income and expenditure on rental property.
Loan Interest Restriction
Currently, loan interest is restricted so that for the current tax year (2019/20), only 25% of the interest is allowable as deduction when calculating the net rental profit. The balance of 75% is given in the form of a ‘tax reducer’ at 20% within the tax calculation. By 2020/21, loan interest will in effect be granted at a maximum rate of 20%.
The calculation of the loan interest can also be impacted if the borrowing exceeds the value of the property when it was acquired or first let.
Non-Resident Landlord Scheme
Consideration should be given to applying into the ‘Non-Resident Landlord Scheme’. This effectively frees the tenant or letting agent from their statutory obligation to deduct tax at the basic rate from the rents before they are paid to you.
This does not mean that the income is exempt, but merely defers the payment of the tax due until the 31 January following the end of the tax year in question.
Tax Return Reporting and Payments of Tax
An individual who rents out a UK property will be required to complete a self-assessment tax return and pay any relevant tax that is due, by 31 January following the end of the tax year in question.
The following information sheet should not be taken as a substitute for specific advice tailored for your requirements. Each individual’s circumstances are different and professional advice should be sought in each and every occasion.
If the tax liability for one year is more than GBP1000, then HM Revenue & Customs will also expect that further payments ‘on account’ are made in relation to the subsequent tax year. Payments on account are due on 31 January and 31 July each year.
The UK tax year covers the period 6 April to 5 April and if the returns are filed electronically, the filing deadline is 31 January following the end of the tax year in question. If it is filed by paper, the filing deadline is 31 October following the end of the tax year in question.
Rental income and expenditure are usually divided between who owns the property (usually jointly or individually). With jointly owned property, HM Revenue & Customs would usually expect the income to be split 50:50. However, if the property is owned in unequal proportions, it is possible to consider whether an election can be made to be taxed on that different basis.
Using Indian as an example. If you are an Indian National living in India, then it would be possible to claim the personal tax-free allowance when calculating the tax that may be due. For the current tax year (2019/20 covering the period 6 April 2019 to 5 April 2020) this is set at GBP12,500.
Thereafter, graduated rates of income tax are applied:
- 20% on the next GBP 37,500
- 40% between GBP 37,501 and GBP 150,000
- 45% over GBP 150,000
Capital Gains Tax
This can be a complex area and there have been significant legislative changes in recent years. If at some stage a UK residential property is sold, this will become subject to the ‘Non-Resident Capital Gains Tax’ (NRCGT) regime. This broadly means that by default, the value of property is uplifted to 5 April 2015 value (if acquired previously) and the difference between that amount and the sale proceeds are subject to NRCGT. The current rates for UK residential property are 18%, 28% or a combination of the two. There are other methods of calculating the position and strict reporting time limits. Therefore, if you are thinking about the disposal of UK residential property, you should seek further advice before doing so.
Legislative changes have also brought commercial property and related types of disposals within the scope of the NRCGT regime and care is needed.
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A UK property will be regarded as a UK situs asset, and dependent upon its value, there could be an Inheritance Tax charge upon the owner’s demise. Advice should be taken as for UK tax purposes, their ‘Domicile’ position will also have a part to play and this is distinctly different from an individual’s ‘residence’ position.
Stamp duty may be payable on the acquisition of a property and if, at the end of any given day, more than one property is owned, the Stamp Duty Rates are increased.
Tax implications for overseas buyers
Professional tax advice should be taken before owning a property in the United Kingdom.