Buy-To-Sell or Buy-To-Let?

Which is the best option: buy-to-sell or buy-to-let properties?

Property Tax Is Complicated

To buy-to-sell or buy-to-let? That is the question…

Running a property business can be financially very rewarding, but one of the issues faced by investors is the complicated tax regime which is not only confusing but can present problems for the unwary.

It can cover income tax, capital gains tax, corporation tax, VAT, SDLT and inheritance tax. Not only that, different strategies have different rules.

This article looks at some of the differences between doing flips and traditional rentals.

Buy-to-sell or buy-to-let: image of confused woman

Who pays the most tax?

Take this as an example. Danny buys a house, does it up and makes a profit of £10,000 when he sells it. His sister Jo takes a different approach. She lets her property out, also for a profit of £10,000. Assuming both are basic rate taxpayers, who pays the most tax?

You would expect the answer to be ‘both the same’, but because Danny has done a flip, this is classed as trading income. He has to pay National Insurance on his profit. Jo has made an investment, so her rental profit is investment income which doesn’t result in a NI bill.

So why the difference? Historically letting property has always been seen as ‘passive income’ ie you don’t have to ‘work’ to earn your money. This might be true if you use a letting agent to manage your property but for many investors it’s a full-time job – more of that and why it’s important in a later article. From a tax point of view though, it’s an investment.

Buying property for development then resale is a trade – it doesn’t matter if it’s a side hustle with a builder mate or your main occupation, it’s always classed as ‘earned income’. This is why NI is due on the profit.

The main tax differences

However, it doesn’t follow that flips are ‘worse’ because of this, it just means different rules apply, along with many others. The table below highlights the main tax differences:

Class of incomeInvestmentTrading
NI payableNoYes
Restricted tax relief on loan interestYes – tax relief given at basic rate onlyNo – fully allowable against profit
Deferred tax relief on purchase costsYes – tax relief is given when the property is soldNo – this gives a tax cash-flow advantage
Deferred tax relief on improvement costsYes – any expenditure before the property is let is deferredNo – this gives a tax cash-flow advantage
Capital gains tax on eventual saleYes – meaning potentially extra tax savingsNo

In our next article, Property Tax Is Complicated #2, we’ll look at Buy to Lets in more detail. If you can’t wait until then, drop us a line.

Check out our Property Investing 101 series.

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