Tax on Rental Income

[drewdavis]

Hey might sound stupid, but why on earth would someone invest in real estate in the UK, get taxed based on your total income while when investing in bonds or stocks, dividends are taxed lower?

Looking to buy a rental property but the taxes on rental income is outrageous

[darthblingbling]

Guess the longer term aim is the view that real estate will grow in value faster than stocks and bonds, the rent received may give a small profit after expenses.

I'm not a financial advisor so this may or may not be true. Most I know caution against it due to liquidity.

[someone]

Hey might sound stupid, but why on earth would someone invest in real estate in the UK, get taxed based on your total income while when investing in bonds or stocks, dividends are taxed lower?

Looking to buy a rental property but the taxes on rental income is outrageous

The primary difference between rental property as an investment and stocks and shares as an investment is leverage. You can borrow against property at good rates. Most people cannot use shares as security for a loan, certainly not at 70%+ LTV.

With careful planning to utilize annual CGT allowances, FTSE trackers have outperformed average rental returns when you are a cash buyer, over longer terms especially if dividends are reinvested. With the new, lower CGT allowance it would be interesting to do a reanalysis to see how it stacks up but it's quite a lot of effort to find all the relevant tax rates and dividends paid to do the calculation over 20+ years and things like "paying dividend tax from other income" vs "paying dividend tax from the dividend income" affects how the portfolio develops.

But once a mortgage comes into the picture, the calculation has, historically, favoured property provided that the mortgage can be serviced even without being able to sell off just enough to use up any CGT allowance each year. More so when a higher rate taxpayer could offset the interest against profits.

CFD and other exotic instruments can allow the same access to leverage, but this cannot be safely done in a hands off way and, unlike a mortgage, where provided you can continue to make the repayments, a (non-realized) fall in property value will be ignored by the mortgage company, being in "negative equity" on derivative investments will lead to a margin call and if you cannot service that, your position will be liquidated even if holding on would allow the position to reverse in a day or two.