Anybody investing in property is liable to pay Income Tax on any profitable income that is generated from his or her properties. There are two main categories of people who invest in property, and both are liable to pay Income Tax:
The Property Investor
If you invest in property for the long term (i.e. you have buy-to-let properties), you will be referred to as a Property Investor (more commonly known as a landlord). This is because you are holding on to a property for the long term.
If you are letting your investment properties, then you will be liable to pay Income Tax annually on the rental profits.
It is also likely that you will have another source of income, unless you have a large portfolio of properties where the rental income funds your lifestyle.
The Property Trader/Dealer
If you are investing in property for the short term (i.e. 6 to 12 months), and intend to sell with the aim of generating a dealing profit, then you will be referred to as Property Dealer or Property Trader.
Property Dealers and Traders are liable to pay Income Tax when they sell the property.
You will find that most full-time property developers or renovators are classed as Property Dealers/Traders.
The current rates of income tax for the 2014–2015 tax year are detailed in the table below:
The above table assumes that the personal allowance is £10,000. It also disregards the 10% tax rate on savings income for the first £2,880.
Case studies Income Tax calculation for property investors
The following case study illustrates the income tax liability for a basic-rate taxpayer.
Case study one - Income Tax calculation for property investor (1)
John works as a local government officer and receives an annual salary of £20,000. He buys a property close to his local hospital for £95,000. He receives a monthly rental income of £600. The property is let for the whole 2014 – 2015 tax year, which means that he has received an annual rental income of £7,200.
In the tax year, he has also incurred property-related expenses of £2,000. These expenditures are made up as follows:
Interest repaid on mortgage £1,200
Plumbing (to fix water leak) £150
Annual gas safety inspection £100
Central heating maintenance contract £300
Replacement door fitted £250
Total Expenditure £2,000
This means that John’s taxable rental profit is £5,200 (i.e. £7,200 – £2,000). On this amount he is liable to pay tax at 20%. This is because his £5,200 rental profit falls into the basic rate band.
Therefore his tax liability is £1,040 on the £5,200 profit.
Case study two - Income Tax calculation for property investor (1)Income Tax calculation for property investors
This is the same scenario as in the previous case study. The only difference is that John has an annual salary of £41,000.
John’s tax liability on the £5,200 profit is now calculated as follows.
The first £865 is taxed at the basic rate of 20%.The remaining £4,335 is taxed at the higher rate of 40%. This is because the rental profit has
taken his total income into the higher-rate tax band.
Therefore his tax liability is as follows: (£865 × 0.2) + (£4,335 × 0.4) £173 + £1,734 = £1,907. John’s tax liability is £1,907 on the £5,200 profit.
For more tax information look to our recent articles, www.martinco.com/news/category/tax-news-tips.