Taxation of Income from Investment

Investing in real estate can be a lucrative way to generate passive income, whether it is from the increase in property values or rental income. However, it’s important to understand the taxation implications of these income streams.

In the UK, capital gains tax (CGT) is payable on the profit made when you sell a property that has increased in value since you bought it. The current CGT rate for individuals is 20% for higher rate taxpayers, and 10% for basic rate taxpayers. However, there are certain conditions that may allow you to reduce your CGT liability, such as using your annual CGT allowance, which for the tax year 2022/23 is £12,300.

On the other hand, rental income is subject to income tax. The amount of tax payable depends on your total income, including rental income, and the tax band you fall into. For the tax year 2022/23, the basic rate of income tax is 20% on income up to £50,270, the higher rate is 40% on income between £50,271 and £150,000, and the additional rate is 45% on income above £150,000. Additionally, if your rental income exceeds certain thresholds, you may be required to register for and pay value added tax (VAT).

It’s worth noting that there are various tax allowances and deductions that can help to reduce your rental income tax liability. For example, you may be able to deduct expenses related to managing and maintaining your rental property, such as repairs, mortgage interest, and insurance costs.

To ensure you comply with all relevant tax laws and regulations, it’s important to seek professional advice from a qualified tax advisor or accountant. They can help you understand your tax obligations, prepare and file tax returns, and take advantage of any tax planning opportunities that may be available to you.