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Property as an Investment. To Buy or Not To Buy?

09 November 2017  14:50    Tom Stephenson

Property as an Investment. To Buy or Not To Buy?

"It is not the answer that enlightens, but the question."
Eugene Ionesco

Property became a popular and valuable investment option for securing assets and generating additional income after the 2008 global financial crisis, but is it still the same story almost a decade later?

Theoretically yes, but you could get hit by a heavy tax bill. Rising property prices led to the government implementing tax changes, most likely to disincentivise property purchases as a form of investment and source of income from buy-to-let properties (and to help boost investment in UK companies).

There were some measures put in place on 6th April 2016 that may make alternative investments a more attractive proposition:

  • A 3% increase on Stamp Duty Land Tax rates on purchases of additional residential property
  • 10% ‘wear and tear allowance’ removed and replaced by furniture relief, which as its name suggests, allows relief on the replacement of certain furniture and goods but not at the original cost.
  • Reduction in capital gains tax of 8% for both higher rate and basic rate, excluding residential property.

The latest measure (which came into force on 6th April 2017) potentially has the biggest impact. Previously income tax was due on rental earnings after the deduction of mortgage interest payments and any other costs. This provided owners with tax relief at 20%, 40% or 45% depending on their marginal rate of income tax. From 6th April 2017, tax relief on finance costs will be reduced gradually over four years and by 2020 it will be limited to a “tax reduction” of 20% (basic rate tax). This change will hit higher-rate taxpayers and some basic-rate taxpayers too, by moving them into a higher tax bracket.

Ultimately, past profit potential on second or buy-to-let properties is being eaten into by greater tax expectations from the government which makes investing in property a less attractive proposition. We wonder what Philip Hammond might have in store with the upcoming Autumn Budget and will be listening closely.

If you are considering buying property as an investment, make sure you understand all the costs and other factors involved before making any moves. As ever, your Courtiers adviser is on hand to answer any questions you might have regarding additional properties and how changes in tax and legislation might affect you.

Tax treatment depends on individual circumstances and may be subject to change in the future

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