With the current tax year due to end on the 5th of April 2023, many homeowners and property investors will be turning their attention to the 2023/24 tax year, which, following the ill-fated mini-budget and the Autumn Statement U-turn that followed, could be a little more complicated to navigate than in previous years.
As such, the end of the financial year is an excellent time for homeowners and investors to review their finances and tax liabilities and ensure they have a clear understanding of the tax landscape ahead.
After all, in the current environment of high inflation, high interest rates and softening house prices, tax efficiency is an important consideration when it comes to minimising risks and maximising returns.
With this in mind, what do homeowners need to know?
Demystifying the taxes on UK property investments
There are three key taxes that have the biggest impact on homeowner and investor tax liability: Stamp Duty, Capital Gains and Inheritance tax.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is a tax that homeowners and investors have to pay when they buy a property in England.
SDLT is calculated by several bands and only applies if the property they are purchasing is above a certain price.
The rate at which the purchase is taxed is determined by the part of the property purchase price falling within each band.
As such, at its current rate, homeowners and investors only need to pay SDLT on residential properties in excess of the £250,000 threshold.
Above the £250,000 threshold, buyers can expect to pay 5% on the next £675,000 (from £250,001 to £925,000) in SDLT.
Moreover, if a homeowner or investor is buying a second or third home, then they will need to pay an additional 3% in SDLT on top of the regular SDLT rates, while overseas investors are expected to pay an additional 2% surcharge on UK property purchases.
The SDLT has come under some criticism in recent years.
In fact, it is worth noting that buyers and investors can apply for a repayment of the higher rates of SDLT for additional properties if they have sold their previous main residence within 36 months of the initial purchase as long as they are the main buyer of the property or an agent acting on their behalf.
Capital Gains Tax
Capital Gains Tax (CGT) is another tax that homeowners and investors must be aware of, as it was reformed in the Autumn Statement 2022.
This tax is charged on any profits that are made from the sale or disposal of an asset, but the rates at which it is charged depend on the type of asset and the tax band of the seller.
As such, for basic rate taxpayers, CGT is charged at a rate of 10% for chargeable assets (i.e. any asset worth more than £6,000 that is not your main home) and 18% for any gains on the sale of a residential property.
For higher and additional taxpayers, however, CGT rises to 20% and 28% respectively, but there are exemptions.
Indeed, during the outgoing tax year, investors have been able to make tax-free gains of up to £12,300.
But, from the start of the new tax year, Jeremy Hunt will cut the exemption to £6,000 and reduce it further to £3,000 for the 2024/25 tax year in a bid to boost the government’s finances.
Clearly, this could have a significant impact on the returns on investment for many homeowners and property investors in the years to come, so how could they reduce liability?
One option could be to sell any properties that are earmarked for sale before the new tax year starts in order to make the most of the £12,300 exemption so that homeowners and investors can effectively make an additional £6,300 in tax-free gains.
Another option to consider is utilising the special capital gains tax rule for transfers of assets between spouses or registered civil partners.
In doing so, homeowners and investors can take advantage of their combined annual CGT exemption by transferring assets between them at a value that gives rise to neither a loss nor a gain.
It is worth noting that special rules apply so seeking expert advice is always advisable.
The final key tax which can affect investors and homeowners’ investments into UK property is inheritance tax, which is particularly impactful for high-net-worth individuals.
This tax is payable on assets that are passed on posthumously and is based on the value of the deceased’s estate once debts have been deducted.
With property generally considered to be the most valuable asset that a person has in their lifetime, it’s vital that homeowners understand the technicalities of this tax so that their property’s inheritance tax liability is as efficient as possible.
For the 2023/24 tax year, the rate at which inheritance tax is charged will be 40%, but it is only charged on the part of the estate that exceeds the allowance threshold of £350,000, and there are ways in which homeowners and investors could take advantage of tax relief.
For example, homeowners can ensure that their estate is taxed at a discounted rate of 36% if they leave 10% or more of the estate to a charity, while there is no inheritance tax liability if the property is left to a spouse or partner.
Alternatively, homeowners could place their property assets into a trust, which does not form part of an estate when they pass away and allows the property to be passed onto relatives or close friends tax-free.
As such, a homeowner could place assets into a trust for the benefit of their children when they reach the age of 18, for instance.
The taxes outlined above can be considered to have the biggest impact on a homeowner or investor’s property investments, but there are other taxes that must be taken into account.
Council Tax, for example, must be paid by the present occupiers of a flat or house, unless the property is being refurbished; while buy-to-let landlords have to pay tax on any income they receive from a rental property.
To briefly conclude, the end of the financial year is an opportune moment to consider one’s finances; and, after all the tax reforms that the mini-budget and Autumn Statement made last year, it’s important that homeowners and investors are aware of how the taxation landscape has changed in order to maximise returns and minimise risk in the tax year ahead.