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Tax liabilities for property investors and developers – by Arthur Weller and Amer Siddiq.


Before you start to invest in property it is important to understand the taxes you will be liable to pay.

The two main types of tax you may be liable to pay are Income Tax and Capital Gains Tax.

(Please Note: There are also other types of taxes including Stamp Duty and VAT, but these are outside the scope of this short guide).

Before you even consider your tax liabilities, it is important to establish the type of investor you are.

You will either be a PROPERTY INVESTOR or a PROPERTY TRADER.

Both are explained below.

Property Investor

People who invest in property for the long-term, i.e. buy-to-let investors, are commonly referred to as property investors. This is because they are holding onto a property for the long-term i.e. 5 years or more, and hence are ‘investing’ in property.

Most property investors are also likely to have another source of income i.e. they are full-time employed.

If you are such an investor then you will be liable to pay Income Tax on your rental profits. You will also be liable to Capital Gains Tax (CGT), on any profits when you decide to sell the property.

Case Study
In 1995, John buys a property close to his local hospital for £45,000. H receives a monthly rental income of £400. He decides to sell the property in 2003 for £110,000.

John will be liable to pay income tax on his annual rental profits. He will also be liable to pay CGT on his £65,000 profit on the sale of the property.

Property Dealer

People who invest in property short-term, with the intention of selling it to generate a dealing profit, tend to be referred to as Property Dealers.

Property Dealers are liable to pay Income Tax only. Even when they sell the property they will be liable to pay Income Tax.

They do not pay CGT (unless they hold a property for a significant period of time)

You will find that most full-time property developers/renovators are classed as Property Dealers

Case Study
Alex purchases a run-down property in January 2003 for £55,000. He spends £20,000 on developing and renovating the property and sells it in June 2003 for £95,000.

On the profit of £20,000 he will be liable to pay Income Tax.

About Arthur Weller

Arthur Weller is a Chartered Tax Advisor (CTA) and an integral part of the Property Tax Portal team. He offers a special rate tax advisory service on any aspect of UK taxation, including property taxation, for as little as £87 for a 30 minute telephone tax consultation.

 

To learn  more about this service click here.