Why has investing in UK property historically been attractive, and what has changed?

Written by Henry Findlater

Historically, property alongside pensions has been one of the most common ways to invest in the UK both for a main residence and a buy-to-let portfolio. As many know, property is an asset class, just as cash, bonds and shares and can serve as a form of diversification when building an overall investment portfolio for assets. In the UK, there have traditionally been many tax incentives for property investing. However, these are slowly being tapered back making other avenues of investing potentially more attractive. In this article, we will explore why investing in UK property has historically been appealing, and what has changed.

Why has investing in UK property historically been attractive?

The UK does not currently charge capital gains tax on the sale of a main residence. As property prices have increased over the years, it has allowed individuals to upgrade and downsize their properties and keep their gains in tact without the extra consideration of what might be payable to HMRC.

In addition to tax advantages provided for a main residence, the UK also allowed for attractive benefits related to buy-to-let properties. Landlords buy to let properties have been able to generate considerable rental income and that income could be offset against mortgage interest and other ‘wear and tear’ allowances leaving a very tax efficient way to place capital to work.

What has changed?

Beginning in April 2016, second properties now attract an additional 3% Stamp Duty Land Tax (SDLT) charge on purchase. The comparative rates applying for SDLT on residential property in England and Northern Ireland, on transactions with effective dates (normally the completion date) from 23 September 2022 to 31 March 2025, are outlined below:

Note that you do not pay SDLT if you buy a property in:

• Scotland from 1 April 2015 — you pay Land and Buildings Transaction Tax (LBTT);
• Wales from 1 April 2018 — you pay Land Transaction Tax (LTT).

Upon sale of a second property, UK capital gains tax is charged at 28% (assuming you are a higher rate or additional rate taxpayer) as opposed to a more favourable gains tax of 20% for the sale of other investments such as shares.

UK residents, who make a disposal of UK residential property must use HMRC’s capital gains tax UK Property Account to report and pay to HMRC any capital gains tax arising from the disposal:

• Within 30 days of disposing of the property, if the completion date was between 6 April 2020 and 26 October 2021.
• Within 60 days of disposing of the property, if the completion date was on or after 27 October 2021.

Non-UK residents have had to report disposals of UK residential property to HMRC since 6 April 2015, even if there is no tax to pay or they have made a loss. Their obligations were expanded, on 6 April 2019, to cover any disposal of residential or non-residential UK land and indirect disposals of UK property.

In tax year 2016/17, a landlord could have offset all of their mortgage interest against rent in calculating taxable profit. In 2018/19, only 50% of the interest could be set off against rent with a 20% basic rate tax credit for the other 50%. By 2020/21, no mortgage interest could be offset. Instead, mortgage interest relief is capped at a 20% basic rate of tax benefit.

The wear and tear allowance was abolished from 6 April 2016, so relief is now only available in respect of expenditure actually incurred in maintaining the property and furniture. Therefore, if furniture is replaced, then the capital expenditure incurred in replacing that furniture can be deducted from the rental income figure. Note that no relief will be given for the initial cost of furniture or other capital items. Relief is however available for the costs of repairs and renewals to the property including fixtures.

With some of the incentives having been tapered back, many people are reconsidering its place in their overall investment portfolio.

The Legal Stuff

This document is for the use of the recipient only and may not be forwarded, copied or distributed without our prior written consent.  This document has been prepared by MASECO LLP for educational purposes only and does not constitute investment, tax or any other type of advice and should not be construed as such.  The information contained herein is subject to copyright with all rights reserved.

The views expressed herein do not necessarily reflect the views of MASECO as a whole or any part thereof.  All investments involve risk and may lose value.  The value of your investment can go down depending upon market conditions and you may not get back the original amount invested.  Your capital is always at risk.  Information about potential tax benefits is based on our understanding of current tax law and practice and may be subject to change.  The levels and bases of, and reliefs from, taxation is subject to change. The tax treatment depends on the individual circumstances of each person and may be subject to change in the future.  MASECO Private Wealth is not a tax specialist.  We recommend that anyone considering investing seeks their own tax advice.

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