Who does this impact?
Anyone who earns income from property letting and is subject to UK tax on that income
From what date do the changes apply?
6 April 2027
Change in Tax Rates
As you may already be aware the UK has different tax rates for income based on whether it is:
- Other Income
- Savings Income
- Dividend Income
At present, Property Income is treated as Other Income – which means it is taxed at:
- 20% in the Basic Rate Band
- 40% in the Higher Rate Band and
- 45% in the Additional Rate Band
From 6 April 2027 there will be a separate class of Property Income – so all rental income (whether from UK or non-UK properties) will be taxed as Property Income at the following rates:
- 22% in the Basic Rate Band
- 42% in the Higher Rate Band and
- 47% in the Additional Rate Band
Examples of the Impact
Example 1: Non-UK Resident with Significant UK Rentals -Annual Rental Profit £80,000 and no other UK Income (entitled to UK Personal Allowance)
Current annual UK Tax Liability:
£12,570 x 0% = £0
£37,700 x 20% = £7,540
£29,730 x 40% = £11,892
Total current UK tax = £19,432
Tax Liability from 2027-28:
£12,570 x 0% = £0
£37,700 x 22% = £8,294
£29,730 x 42% = £12,487
Total current UK tax = £20,781
So, the UK tax liability has increased by £1,349 per annum.
Example 2: UK-Resident, Annual Gross Employment Income £80k pa, Rental Profit £7,500
Current annual UK Tax Liability:
£7,500 x 40% = £3,000
Tax Liability from 2027-28:
£7,500 x 42% = £3,150
So, the UK tax liability on the rental profit has increased by £150 per annum.
Possible Actions to Mitigate Tax
FIG Regime re Foreign Rental Income
- If you are only recently arrived in the UK, you may be eligible for the FIG regime to exclude your non-UK rental income from UK tax
- This can only applies for the first 4 years of UK-residence and carries other tax consequences – so may not be beneficial – comparison calculations need to be prepared
Reduce Property Portfolio by Selling Properties:
- There will be Capital Gains Tax (CGT) on disposal so important to understand the tax consequences before acting
- If the property is based outside the UK there may be CGT implications in both UK and the country where the property is located
- This might, depending on your circumstances, reduce your UK Inheritance Tax (IHT) exposure
- You need to consider the tax position of any new asset or investment in which you invest the proceeds – is the tax position of the income from that any better?
Consider Who Owns the Properties:
- Would the tax be lower if your spouse owned the property or a bigger share in it?
- Increasing your spouse’s share or transferring the property to your spouse may have CGT or IHT consequences, so it is important you understand these before acting
Offsetting the Tax:
- Depending on your circumstances, you may have options available to help offset the tax, for example making contributions to UK pension (subject to limits)
- These offset strategies will have tax consequences, so you need to understand these before acting
Summary
Many of our clients own rental properties and will be impacted by these changes, if you want to discuss the impact on your specific situation please contact Joanne Lamberth: joanne@fairwaytax.com.au