Written by Alpa Bhakta, CEO, Butterfield Mortgages
The new financial year is upon us and as such, many homeowners and property investors will likely be shifting their focus toward financial planning.
Following the recent political and economic volatility and the changes resulting from the mini-budget and subsequent Autumn Statement U-turn, advisers and their clients may have noted additional challenges when navigating the intricacies of the new tax year.
In any case, the beginning of the new financial year presents a prime opportunity for homeowners and investors to assess their financial affairs and clearly understand the key tax considerations that could impact their property investments.
Indeed, under the prevailing circumstances of escalating inflation and elevated interest rates, ensuring the most effective steps are taken toward tax efficiency can go a long way towards maximising potential returns.
What are the key taxes to keep in mind?
The three main taxes impacting the life cycle of property investments are Capital Gains, Stamp Duty and Inheritance Tax. So, what will be the key considerations to factor into the 2023/24 tax year?
Capital Gains Tax
Firstly, homeowners and property investors should be mindful of the changes to Capital Gains Tax (CGT), which underwent reform during the Autumn Statement 2022. CGT is levied on any profits realised by the sale or disposal of an asset. However, the rate at which gains are taxed varies depending on the tax bracket of the seller and the type of asset.
As such, if you are a basic rate taxpayer, the applicable CGT rate for chargeable assets (i.e. any asset valued at over £6,000 that is not your primary residence) is 10%, and for gains from the sale of a residential property, it is 18%. However, for those with a higher or additional tax rate, the corresponding CGT rate is 20% or 28%, though exceptions exist.
In the previous tax year, for instance, homeowners and property investors were able to generate tax-free gains up to the £12,300 exemption threshold. However, Jeremy Hunt has decided to bring the exemption threshold down to £6,000 for the 2023/24 tax year and £3,000 for the 2024/25 tax year.
It is worth noting here that special rules apply to spouses and civil partners, enabling them to transfer assets between them at a value that gives rise to neither a gain nor a loss. Following the Spring Budget 2023, separating couples will be provided up to three years in which to make no gain or no loss transfers of assets when they cease to live together.
Stamp Duty Land Tax
When purchasing a property in England, homeowners and investors are also required to pay Stamp Duty Land Tax (SDLT), which is calculated by the amount of the purchase price that falls within each of the several bands. The current Stamp Duty rates were frozen in last year’s mini-budget, so they will remain in place until the 31st of March 2025. Meanwhile, it’s important to note that buyers are only required to pay it if the property they are buying exceeds the £250,000 threshold.
For purchases above the £250,000 threshold, the buyers will face an SDLT charge of 5% on the next £675,000 (from £250,001 to £925,000). In the upper echelons of the market, a charge of 10% is levied on the next £575,000 (from £925,001 to £1.5 million), and any property purchase that surpasses £1.5 million is subject to a rate of 12%. For second or third-home buyers, there is an extra 3% on top of the standard SDLT rates, while overseas property investors need to pay a supplementary 2% surcharge on their purchases of UK properties.
According to some of Butterfield’s own research, this tax is seen as ‘outdated’ by 58% of homeowners and buyers, while SDLT is preventing 23% of buyers from moving up or onto the property ladder.
It is worth mentioning that buyers and property investors can request a reimbursement of the higher rates of SDLT for additional properties if they have sold their previous primary residence within 36 months of the first purchase – provided that they are the main purchaser of the property or an agent acting on their behalf.
Inheritance Tax
No further changes were announced in the Spring Budget in relation to inheritance tax, which is payable on an individual’s estate in the event of their death.
The amount of tax is calculated based on the value of the deceased’s estate minus any debts. Given that property is typically among the most valuable assets people possess, it is crucial for IFAs to effectively communicate the intricacies of this tax to their clients to ensure that their estate is taxed as efficiently as possible after their death.
In the 2023/24 tax year, inheritance tax will be charged at a rate of 40%. However, it only applies to the portion of the estate that exceeds the allowance threshold of £325,000, and there are strategies that homeowners and investors can employ to minimise their liability.
One possibility is to leave 10% or more of one’s estate to a charity, which would enable a discounted rate of 36%. Additionally, if the property is left to a spouse or partner, there is no inheritance tax liability.
Another option is to transfer property assets into a trust. This would not form part of the estate when the individual passes away, and the property can then be passed tax-free to relatives or close friends. For example, a homeowner could establish a trust for the benefit of their children that would mature when they reach the age of 18.
Additional taxes to be aware of
Other than the major taxes mentioned above, there are also some minor taxes that should be considered by homeowners and investors. Present occupiers of a flat or house are generally required to pay Council Tax unless the property is undergoing refurbishment, while buy-to-let landlords must pay tax on any rental income they receive from their property.
Final thoughts
In conclusion, the beginning of the new financial year presents a favourable time to assess one’s financial situation and seek expert advice when needed. It is crucial for homeowners and property investors to be mindful of the modifications in the tax landscape in order to optimise potential returns and ensure their objectives remain aligned. Alpa Bhakta is the CEO of Butterfield Mortgages, a London-based prime property mortgage provider with a focus on the needs of UK and international HNWIs.
Butterfield Mortgages Limited does not provide tax, legal or accounting advice. This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Butterfield Mortgages Limited is authorised and regulated by the Financial Conduct Authority (FRN:119274).
