Tax liabilities (Property Investors and Developers)

Before you start to invest in property it is important to understand the taxes you will be liable to pay.

The two main types of tax you may be liable to pay are Income Tax and Capital Gains Tax.

Before you even consider your tax liabilities, it is important to establish the type of investor you are.
You will either be a PROPERTY INVESTOR or a PROPERTY TRADER.
Both are explained below.
Property Investor
People who invest in property for the long-term, i.e. buy-to-let investors, are commonly referred to as property investors. This is because they are holding onto a property for the long-term i.e. 5 years or more, and hence are ‘investing’ in property.
Most property investors are also likely to have another source of income i.e. they are full-time employed.
If you are such an investor then you will be liable to pay Income Tax on your rental profits. You will also be liable to Capital Gains Tax (CGT), on any profits when you decide to sell the property.


Case Study

 

In 1984, Bob buys a property close to his parents  for £50,000. Bob receives a monthly rental income of £480 a month. He decides to sell the property in 2010 for £110,000. In simple terms, Bob will be liable to pay income tax on his annual rental profits and will also be liable to pay CGT on his £60,000 profit on the sale of the property. There are a number of reliefs that Bob may be able to benefit from.
Property Dealer
People who invest in property short-term, with the intention of selling it to generate a dealing profit, tend to be referred to as Property Dealers.
Property Dealers are liable to pay Income Tax only. Even when they sell the property they will be liable to pay Income Tax. And not Capital Gains Tax.
You will find that most full-time property developers/renovators are classed as Property Dealers

 

Case Study

 

Samantha purchases a run-down property in January 2009 for £55,000. She spends £40,000 on developing and renovating the property and sells it in June 2010 for £120,000.

On the profit of £25,000 she will be liable to pay Income Tax.

 

Tax planning should be undertaken prior to the purchase of any investment property. Trying to mitigate your liabilities at the point of sale is too late.

 

You must in all cases seek your own independent legal and tax advice from HM Revenue&Customs or other suitably qualified person. The Council /Officer will not be held responsible for any guidance or advice given in respect of legal or financial matters. The case studies specified on this website are for illustrative purposes only.