Tax Planning For A United Kingdom Investment Property

Due to the in-depth nature of the system, it is important that you consult an expert tax advisor when considering your purchase in the UK. Here you can obtain a brief guideline to the UK property tax system.


Tax on Rental Income

Tax is charged on rental income at up to 40%, dependant on your individual status.

Rental income, whether from all or part of your property, is regarded by the tax authorities as if you were running a rental business. As the “landlord” you will be taxed on the overall net profit made from rental income each year, after deducting any allowable property-related expenses.

For landlords who do not live in the UK for most of the time, but receive rental income from UK property, the arrangements to pay tax are different. For further information visit Hmrc.gov.uk.

If you rent a room out in your own home, under the Rent a Room Scheme, a tax free ceiling of 4,250 GBP per year is allowed.

Capital Gains Tax (CGT)

Depending on your income bracket, CGT is charged at 10%, 20% or 40% on the proceeds of a property sale, or the market value of a gift, less its original cost. This tax is payable by 31 January following the relevant tax year; however, if you are a non-resident of the UK, you may not be liable to pay CGT. As ever, there are some important exceptions (eg. gains in disposal of UK assets used to carry on a trade, profession or vocation in the UK).

Investors in commercial property can benefit from a potential 75% Capital Gains Tax exemption. This is achievable after owning a commercial property for just two years and a potential 50% exemption applies if you sell between one and two years after purchasing the property.

Value Added Tax (VAT)

A hugely complex issue, VAT is subject to wide interpretation and your tax advisor will need to advise you on your particular obligations. VAT is charged on many of the costs relating to the purchase of your English property, eg. architects, estate agents, lawyers, surveyors, and is set at 17.5%.

VAT is not normally charged for the letting of residential accommodation and the VAT paid on costs relating to rental property is rarely recoverable.

VAT is charged on services relating to UK land regardless of the place in which the recipient resides for VAT purposes; the zero-rating available in respect of certain international services is not available where the services relate directly to UK land. Some associated services less directly connected with land (for example, accountancy fees) will usually be zero-rated.

Inheritance/Wealth Tax (IHT)

As in most countries, it is important to plan in advance to avoid your beneficiaries paying inordinate amounts of tax upon inheritance. IHT is charged at 40% for property exceeding the value of £300,000. However, recent legislation has doubled the value of assets that couples can leave behind without incurring inheritance tax. Married couples and civil partners now have a combined threshold of £600,000, rising to £700,000 by 2010.

There are ways in which you can greatly reduce or abolish this tax:

  • “Gifts” can be given seven years before your death
  • A discretionary trust could be set up
  • Property can be owned through the medium of a non-UK registered company

Stamp Duty

Although Stamp Duty hasn’t yet reached the levels found elsewhere in Europe, it is nevertheless a significant cost when investing in UK property. As a general guide, duty is charged at the following rates:

Property price Stamp Duty
Under 60,000 GBP None
60,000 - 250, 000 GBP 1% of total purchase price
251,000 – 500,000 GBP 3% of total purchase price

Council Tax

The main form of local property taxation in England, Council Tax is charged on domestic property and is collected by the local authorities. Generally, the higher price, the greater the tax will be.

There are three circumstances when your council tax bill may be reduced:

  1. via the reduction scheme for disabled people
  2. the council tax benefit and second adult rebate
  3. if you own the property and no one is resident

Furnished second or holiday homes in England and Scotland will be liable for Council Tax but will enjoy a 10% - 50% discount because no one lives there on a permanent basis.

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