It was once said that the only certainties in life are death and taxes, but while this might be true, understanding those things is not always easy, especially if you are a property investor.
If property is an income stream for you, then there are a number of different tax implications that you need to understand in order to stay the right side of the law as well as making the best and most profitable investment decisions.
Property investment includes purchasing a property to rent out or the buying of any property with the intention of selling it on again for a profit. This includes buy-to-let properties, second homes, business premises or land.
If you choose to invest in property, then you are most likely to be liable for Capital Gains Tax. This will be payable on the differences between the cost of the property and any proceeds that you make from it. Whilst you can deduct the costs associated with the sale from this gain, you cannot include any mortgage interest or maintenance costs.
This tax is only applicable to investors and not to anyone who lives in a property as a main residence. You will not usually have to pay Capital Gains Tax if you transfer the property to a partner if you have lived together for a least part of the tax year in which you made the disposal. If they go on to sell the property, they will have to work out the tax that is due. It is calculated through your Self-Assessment tax return, and it is important that you get in touch with HMRC if you are not requested to complete one.
A property developer builds the property from scratch or makes significant improvements to a run-down property in order to sell it on as part of a trade. This also applies to anyone who buys and sells property as a main business. A property developer is seen as having a trade, and therefore is required to pay Income Tax and National Insurance on their profits.
Any expenses that are occurred in the process, including mortgage or loan interest can be deducted from the profit. Anyone who helps the developer will be considered an employee and will be subject to the PAYE/NIC scheme.
Property development schemes are not always quick ones, and should they continue across multiple tax years, then the income can be spread across them too. If you are a self-employed developer, you will be liable to pay Class 2 National Insurance at a weekly rate and Class 4 National Insurance at a rate of 9% or 2% depending on their income.
Making the distinction between property investment and development is important in order to make sure that you are paying the right taxes. This will help you to calculate what costs you are liable for, which is important before embarking on any project to ensure that it is worth your while.
Peter Scully is the Marketing Consultant at Rogers Spencer who are Chartered Accountants in Nottingham who can provide businesses with tailored accountancy services.