Tax and property investment

You can invest in property in two ways – directly or indirectly. Both ways involve some complicated financial issues, and one of those is tax. You should do your best to minimise tax to get the most out of your investment.

Property investment explained

  • Direct property investment means you buy all or part of the property yourself. Property might increase in value over time, and, in the meantime, you can rent it out or potentially live in it if this is acceptable to your mortgage lender.
  • Indirect property investment means you don’t directly own the property, but you do get a share of any profits or losses. You buy into a property fund, or a company, and get dividends and/or capital growth when the fund makes a profit.

Direct property investments – Tax on buying and selling

Selling property: Capital Gains Tax

Whether or not you pay Capital Gains Tax (CGT) on the money you make from a property depends on whether it’s your home – the property you live in for most of the time or have lived in within the last three years.

  • Selling your main home in the UK will generally mean you won’t have liability to pay CGT – this is because you can claim Private Residence Relief on any profit subject to certain conditions having been met. If you have let out some or all of your home during any period of your ownership from 31 March 1982, you might need to pay CGT.
  • If you sell another property – for example, a holiday let, a rental property or a property you bought for someone else to live in – you can’t claim Private Residence Relief and might need to pay CGT.
For more information on Private Residence Relief visit the GOV.UK website.

When you sell a property in the UK, deduct your tax-free allowance from your total gains. Add this to your taxable income. If this amount is within the basic rate Income Tax band you’ll pay a rate of 18% on any gain (profit). If you’re a higher or additional-rate taxpayer, you’ll pay 28%. The annual CGT tax-free allowance is £12,300 for the tax year 2021/22.

Couples jointly owning their property can combine their individual allowances, potentially allowing a gain of £24,600 before liability to pay CGT.

Buying property

If you’re buying a property in England or Northern Ireland, you might have to pay a tax called Stamp Duty Land Tax.

Land Transaction Tax applies in Wales while Land and Buildings Transaction Tax applies in Scotland.

In England and Northern Ireland this tax applies if you’re buying a property that is more than £125,000, or a non-residential property that is more than £150,000. There are different rates of tax depending on how much the property is worth, whether you own another property and where you live.

Importantly, under current rules until 30 June 2021, Stamp Duty is paid when the purchase price exceeds £500,000. On 1 July 2021, the threshold will lower to £250,000 until 30 September 2021, and then from 1 October 2021 the threshold will revert to £125,000.

In other words, the more expensive the property is, the higher the rate of tax you will have to pay.

In addition, you’ll have to pay an extra 3% on top of each Stamp Duty band when you buy an additional second home or a residential buy-to-let property.

Property investment for your family – Leaving a property as a legacy

You might choose to invest in property, so you can have something valuable to leave to your family. If so, you might need to think about Estate planning and the implications of Inheritance Tax.

Direct property investments – Tax on rental income

If you’re renting out a property to someone, there are different ways the rental income might be considered for tax purposes:

  • residential letting
  • furnished holiday lets, or
  • the Rent a Room relief scheme.

With residential letting and furnished holiday lets, you can claim back expenses to reduce your tax bill.

With residential letting and furnished holiday lets, you can claim back certain HMRC permitted expenses to reduce your tax bill. With the Rent a Room relief scheme, you get a tax-free allowance.

Residential letting as a property investment

If you rent out some or all of a property for someone to live in, you pay tax on the profits you make on the rental income. You treat these profits just like a normal part of your income, so you’ll pay tax at your normal rates. You can reduce the tax you pay by making sure you calculate the profits correctly.

This involves working out what you can deduct as allowable expenses – things like letting agents’ fees, Council Tax and buildings insurance. Since 6 April 2020, Income Tax relief on all residential property finance costs is restricted to the basic rate of Income Tax. Different rules apply to properties owned by companies or landlords with furnished holiday lettings.

Allowable expenses

You can deduct ‘allowable expenses’ from your rental income when you work out your taxable rental profit, as long as they are wholly and exclusively for the purpose of renting out the property. Examples of expenses incurred wholly and exclusively for a rental property are available on the GOV.UK website.

Replacement of Domestic Items Relief

Before 6 April 2016, if the property you let out was fully furnished, you could claim an annual wear and tear allowance.

This type or relief is now no longer available for Income Tax purposes and was replaced by Replacement of Domestic Items Relief. Detailed information and examples are available on the GOV.UK website.

If you replace a domestic item in a property which qualifies as a furnished holiday let, Replacement of Domestic Items Relief isn’t available. You will continue to be able to claim capital allowances on these items.

If you use the Rent a Room Relief, Replacement of Domestic Items Relief isn’t available.

Holiday letting as a property investment

If you have a property you rent out as a furnished holiday let, and it meets certain conditions, you might also get a capital allowance for furnishing the property:

  • it must be in the UK or European Economic Area (EEA)
  • you can’t usually let it to anyone for more than 31 days at a time.
  • it must also be available for let for at least 210 days a year as furnished holiday accommodation and actually let for at least 105 days.

Capital allowances are available on fixtures and integral features and on other costs incurred within your furnished holiday let.

This might include expenditure on furniture, fixtures and fittings.

The Rent a Room relief scheme

If you rent out rooms in your house to lodgers, you can either treat this as a residential property letting or you can claim Rent a Room relief.

You can only do this if it’s just a room accessible from your house, not a separate flat, and the lodger shares common areas like your kitchen.

The Rent a Room Scheme has tax advantages or disadvantages depending on your situation.

The rules are that:

  • you don’t pay tax on the first £7,500 of your rental income
  • you can’t deduct any expenses or wear and tear allowances
  • if you make a loss, you can’t deduct it from your other taxable income.

If your house is jointly owned, each of you can claim £3,750 of tax relief.

The combined claim adds up to the £7,500 tax relief allowed under the scheme.

For example, if you’re the sole owner of the house and get £7,900 in rent, you won’t have to pay Income Tax on £7,500. You’ll have to pay tax on the £400 that is over the threshold. You’d need to pay this tax even if the cost of maintaining the room is more than what you earn in rent.

As a very rough rule of thumb, if it costs you more than around £4,000 to maintain the room, then you’re probably better off not claiming the relief.

Indirect property investments

Instead of buying and managing your own property investments, you can invest in property through a fund or by buying shares in property companies or schemes. There are a few different types of property fund.

Some have special tax treatment and you might need to take regulated financial advice.


Real estate investment trusts (REITs)

A REIT has two separate elements for tax purposes: a ring-fenced property letting business which is exempt from Corporation Tax; and non-ring-fenced activities like property management services which are not.

If the REIT you invest in does well, you’ll receive a distribution of the profits.

  • Payments from the tax-exempt element are treated as UK property income for the investor and are paid net of basic rate tax - non taxpayers can re-claim this and if the REIT is held in an ISA, investors receive payments gross.
  • Payments from the non-exempt element are treated the same as any UK dividend and paid with a tax credit.

Property Authorised Investment Funds (PAIFs)

PAIFs are a newer form of property investment fund, very similar to REITs. They also have tax breaks, which are passed on to you.

Other property investment funds

Top tip - avoid scams and advisers who are not regulated by the Financial Conduct Authority

If you think you’ve been mis-sold something – whether it’s a mortgage or a property fund – you can get help from the Financial Ombudsman Service but only if the firm was regulated by the Financial Conduct Authority (FCA), so always check.

There are plenty of property funds that are neither REITs nor PAIFs and so don’t come with any special tax breaks.

Most of these are reasonably stable but some are risky.

Always check if a property fund is regulated by the Financial Conduct Authority (FCA) before you consider investing.

Did you find this guide helpful?