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Investment in brick-and-mortar properties is one option when discussing property investments. Taking advantage of the real estate market’s prospects is also possible in other ways that do not have substantial barriers or regulations to access. However, to avoid making costly mistakes, anybody interested in purchasing property must be aware of the tax repercussions of the various accessible investment products.
It is commonly known that investing in property may be profitable and is generally a safe option, especially over a long period. However, purchasing properties requires a substantial cash flow for deposit, time, and energy. Other costs associated with buying a property, such as the SDLT, solicitors, and estate agents fees, are in addition to the deposit required to get a mortgage. These costs are potentially a substantial sum. Post-purchase commitments will be the costs associated with maintaining property investments.
Property renting adopted as a business will call for careful tax planning. Renting properties is considered a commercial activity. The sale of such properties is subject to capital gains tax, which applies to any profits made by selling such property. Investing in other products indirectly related to property and real estate investment is a simpler and more convenient method of increasing your investments.
Individual Savings Account (ISA) for Real Estate: A property individual savings account (ISA) now allows for an annual contribution of up to £20,000. These individual savings accounts (ISAs) focus on real property investments only. Your contributions will be invested in various online platforms which directly or indirectly are associated with real estate investment trusts. Money is invested in buy-to-let properties in key cities across the United Kingdom structured under various investment companies, venture capital, and other national and foreign structures. The return on your investment will be distributed as the market behaves. This return is in addition to the rental income received from tenants. If you do not invest more than the annual maximum of £20,000 in a Property ISA, you won’t be subject to any taxes on the gains you make on those investments. In addition, you can move your money between two ISA without losing tax benefits.
Peer-to-peer lending: There has been a boom of online platforms that assist in matching lenders and borrowers in different industries and markets. You can use a peer-to-peer network to establish a customised investment opportunity for yourself as a lender—the money you lend funds buy-to-let mortgages for investors. Your funds can be invested in multiple ways and on various assets to lower risks associated with such investments. You should expect a regular income from your investment, which is often paid monthly but might vary depending on the arrangement.
Because the income generated from these investments is subject to income tax, you will be required to pay tax at a rate of 20%, 40%, or 45%, subject to the basic rate, the higher rate, or the additional rate accordingly. For foreign landlords or investors, normally, tax is withheld at the source of interest from a savings account. However, they will be required to report the income on a self-assessment tax return if the associated entity does not withhold tax.
Property Investment Funds: Investing in a property fund allows access to commercial property, which can be more lucrative than the sale of residential property investments. These are known as open-ended investment companies (OEICs) or unit trusts. Their primary function is to pool the capital a number of investors contributed and then invest it in commercial real estate. The investment is often made by opting into an option to buy a unit or a specified number of shares at a price on that particular day. As a result, the price may increase or decrease depending on how well the investment does over time.
You already have the option to hold your property fund under your stocks and shares ISA, which means that gains on investments of up to £20,000 will be exempt from taxation. However, selling units from a unit trust will be subject to capital gains tax. CGT will only be owed on amounts in excess of your yearly allowance and will be calculated at a rate of 10% for taxpayers who pay the introductory rate and 20% for taxpayers who pay the higher rate.
Before opting to invest in any of these products, it is imperative that you consult the guidance of a seasoned investment professional, such as an independent financial adviser. This step is critical. Keep in mind that investments inherently include risk. However, if you carefully consider the various paths available, you can reduce the likelihood that any profits will be subject to taxation.
If you are a landlord or property investor and looking for advice on how income tax and capital gains tax please call our office on 08001357323 for specialist advice.