Property investment — tax aspects

Invest­ment in prop­er­ty has been and con­tin­ues to be a pop­u­lar form of invest­ment for many peo­ple. It is seen as a route by which:

• rel­a­tive­ly secure cap­i­tal gains can be made on even­tu­al sale
• income returns can be gen­er­at­ed through­out the peri­od of own­er­ship
• mort­gage finance is cov­ered in repay­ment terms by the secu­ri­ty of the even­tu­al sale of the prop­er­ty and in inter­est terms by the rental income.

Of course, the net returns in cap­i­tal and income will depend on a host of fac­tors. But on the basis that the invest­ment appears to make com­mer­cial sense, what tax fac­tors should you take into account?

This fact­sheet should be con­sid­ered only in rela­tion to a UK res­i­dent prop­er­ty own­er.

Who or what should purchase the property?

An ini­tial deci­sion needs to be made whether to pur­chase the prop­er­ty:

• as an indi­vid­ual
• as a joint own­er or via a part­ner­ship (often with a spouse)
• via a com­pa­ny.

There are sig­nif­i­cant dif­fer­ences in the tax effects of own­er­ship by indi­vid­u­als or a com­pa­ny. Decid­ing on the best medi­um will depend on a num­ber of fac­tors. These include:

• if you already own a com­pa­ny
• expect­ed draw­ings from the com­pa­ny
• whether you are expect­ing to invest in more prop­er­ty in the future
• whether you are expect­ing to sell indi­vid­ual prop­er­ties piece­meal or as a port­fo­lio in the future
• if you are main­ly financ­ing the ini­tial pur­chas­es of the prop­er­ty from your own cap­i­tal.

Initial purchase of the property

SDLT is payable by the pur­chas­er of the prop­er­ty in Eng­land and North­ern Ire­land. Land and Build­ings Trans­ac­tion Tax is payable in Scot­land and Land Trans­ac­tion Tax is payable in Wales. The rates are depen­dent on the val­ue of the prop­er­ty and whether it is res­i­den­tial or non-res­i­den­tial.

Purchase by company

Where res­i­den­tial prop­er­ty, val­ued at more than £500,000, is pur­chased by a ‘non nat­ur­al per­son’, broad­ly a com­pa­ny, there is a poten­tial charge — the Annu­al Tax on Enveloped Dwellings (ATED). The ATED is payable by those pur­chas­ing and hold­ing res­i­den­tial prop­er­ty through cor­po­rate envelopes, such as com­pa­nies. In addi­tion a high­er rate of SDLT of 17% applies to the pur­chase.

There are exemp­tions from the high­er rate of SDLT and the ATED charge; in par­tic­u­lar, prop­er­ty com­pa­nies let­ting out res­i­den­tial prop­er­ties to third par­ties.

Ongoing rental

Rental income

For per­son­al­ly-owned prop­er­ty the net rental income is sub­ject to income tax. Spe­cif­ic rules apply to split rental income for joint­ly owned prop­er­ties and we can assist you with under­stand­ing these fur­ther.

In con­trast, the net rental income for a com­pa­ny will be taxed at the cor­po­ra­tion tax rate which may be low­er than the income tax rates for an indi­vid­ual depend­ing on the amount of rental and oth­er sources of income. How­ev­er there is fre­quent­ly a fur­ther tax charge should you wish to extract any of the pro­ceeds from the com­pa­ny.

The over­all tax cost on income will there­fore be par­tial­ly depen­dent on how much of the income you wish to extract and how that income will be extract­ed e.g. salary, div­i­dend, pen­sion con­tri­bu­tion etc. Where prof­its are retained by the com­pa­ny, the income may suf­fer less tax than if income tax applied. That means there are more funds avail­able to buy more prop­er­ties in the future.

Finance costs

Tax relief for finance costs on res­i­den­tial prop­er­ty held by an indi­vid­ual is lim­it­ed to 20% as a basic rate income tax reduc­er.

This restric­tion does not apply to non-res­i­den­tial land­lords nor to com­pa­nies invest­ing in res­i­den­tial or non-res­i­den­tial prop­er­ty.

Renting a commercial property to your own limited company

The per­son­al pur­chase of new offices or oth­er build­ings and the charg­ing of rent for the use of the build­ings to your com­pa­ny may be tax effi­cient from an income tax posi­tion as:

• the rental you receive from the com­pa­ny allows sums to be extract­ed with­out Nation­al Insur­ance
• the com­pa­ny will be able to claim a cor­po­rate tax deduc­tion for the rent
• finance costs are cur­rent­ly deductible from the rental income.

How­ev­er, to the extent that rent is paid from the com­pa­ny, this may impact the avail­abil­i­ty of Busi­ness Asset Dis­pos­al Relief on a future dis­pos­al of the prop­er­ty (see below).

Disposal

Cap­i­tal gains on the dis­pos­al of an asset are gen­er­al­ly cal­cu­lat­ed by deduct­ing the cost of the asset from the pro­ceeds on dis­pos­al and reduc­ing this by the annu­al exemp­tion. Gains are treat­ed as an indi­vid­u­al’s top slice of income and are gen­er­al­ly taxed at 18% and 24% or a com­bi­na­tion of the two. These rates apply regard­less of whether the prop­er­ty is res­i­den­tial or non-res­i­den­tial (pre­vi­ous­ly dif­fer­ent rates applied to non-res­i­den­tial i.e. com­mer­cial prop­er­ty dis­pos­als).

Cap­i­tal gains for com­pa­nies will be sub­ject to the rate of cor­po­ra­tion tax applic­a­ble to the com­pa­ny i.e. 19% or 25%.

Business Asset Disposal Relief (BADR)

BADR is avail­able on the dis­pos­al of trad­ing busi­ness­es by indi­vid­u­als and there­fore gen­er­al­ly would not apply to prop­er­ty held by an indi­vid­ual as this would be con­sid­ered invest­ment activ­i­ty.

How­ev­er, where an indi­vid­ual owns a com­mer­cial prop­er­ty used by their trad­ing busi­ness and the prop­er­ty is dis­posed of as part of a dis­pos­al of the busi­ness then the indi­vid­ual may ben­e­fit from the BADR rates (18% for 2026/27) on the dis­pos­al of the prop­er­ty as an ‘asso­ci­at­ed dis­pos­al’. Relief is lim­it­ed where the com­pa­ny pays rent on the prop­er­ty; BADR is not avail­able where mar­ket val­ue rent has been paid to the indi­vid­ual.

Care should also be tak­en around insert­ing an invest­ment prop­er­ty into your trad­ing com­pa­ny as this may result in your share­hold­ing in that com­pa­ny not qual­i­fy­ing for BADR. You should con­sid­er whether anoth­er com­pa­ny should be formed to hold prop­er­ty to pro­tect the trad­ing sta­tus of the exist­ing com­pa­ny.

Disposal of a property investment company

CGT will be due on the gain on dis­pos­al of the shares by the indi­vid­ual.

The dis­pos­al of shares may be more attrac­tive to the pur­chas­er of the prop­er­ties rather than buy­ing the prop­er­ties direct­ly, as they will only have 0.5% stamp duty to pay rather than the poten­tial­ly high­er sums of Stamp Duty Land Tax (SDLT) on the prop­er­ty pur­chas­es.