Property investors hold on to their property assets for an extended period as fixed assets. In this case, it is likely they also let their properties to raise revenue.
They may build their own property/ies. However, with rocketing sales prices, the property will not be marketed or sold immediately after the development work is complete.
Property investing is similar to the dividends from holding share investments or the interest received on bank deposits; the investment income is passive, and the property investor does not have to do anything to generate income.
- No NICs are due.
- Costs are not allowable once the property is no longer being let.
- Profits from the rental activity are subject to income tax – at rates as high as 45%.
- Losses from renting out one property may be offset against the income received from other properties.
- Any finance costs or repairs are not allowed for Capital Gains Tax (CGT) purposes unless the investment property is being let out.
- On the other hand, profits from the sale of investment properties are subject to CGT at no more than 28%. The percentage drops to 20% for non-residential properties.
- There are no restrictions for dwelling-related loans.
- National Insurance contributions (NICs) will also be due.
- Any losses made on the project can be set against income from other sources.
- The interest costs for the project period will be allowed against income derived from there.
- Profits from the sale of a developed property will be treated and taxed as income to a maximum rate of 45%.
For many, purchasing a property, glossing it up, and selling it for a profit is an attractive proposition. However, it is not as clear-cut. From a tax perspective, investing in a property and trading are crossed, and the consequences are not the same.
Suppose the goal is to sell the property for more than it costs to buy and refurbish it for tax purposes. In that case, it is essential to determine whether that surplus is a chargeable gain liable to CGT or a trading profit liable to income tax.
A gain in an investment property is taxed as a chargeable gain. Alternatively, if the property market fell and the property was sold at a loss, it would be an allowable loss. Any gains over the annual exempt amount would be charged at the residential property rates of CGT.
Alice purchases a run-down property as a long-term investment to refurbish and rent it out. Due to personal circumstances, she decides to sell the property shortly after the renovations are over, earning a gain of £50,000 – even though the original intention was to hold the property. Therefore, the gains are chargeable to CGT.