Tax is an issue of personal circumstances and it is important to discuss your particular case with a tax expert. Below is a general account of the tax you can expect to pay when purchasing property in the UK.
Many people are choosing property investment over pensions to provide for their retirement, and property rental is an increasingly popular option. Tax will be payable on rental income at up to 40% depending on your individual case.
If you rent out all or part of your property and receive rent, for tax purposes this is treated by the tax authorities as if you are running a rental business and whether you are renting out one or many properties, for tax purposes each will all be treated as a single business.
As a landlord, you will be taxed on the overall net profit from rental income every year. The profit is calculated by adding all your rental income together and deducting any allowable property-related expenses. Income from properties owned outside the UK, described as overseas property income, is taxed as foreign income.
A Rent a Room scheme for the rental of part of your own home, a tax free ceiling of 4,250 GBP per year is allowed. If you rent out your property abroad, you may also have to pay UK tax on the rental income.
Properties that are let out to tenants living in them as their main home count as 'residential lettings'. For tax purposes, this type of business is treated differently from furnished UK holiday lettings.
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.
CGT is calculated separately from income tax and is charged at rates of 10%, 20% and 40%, depending upon your income bracket. Essentially, CGT is charged on the proceeds of a property sale, or the market value of a gift, less its original cost, and after any selling and improvement expenses have been taken into account.
Capital Gains Tax is payable by 31 January following the end of the relevant tax year. If you are resident in the UK, you are liable for CGT on your worldwide assets and gains. Non-residents are normally not liable to pay CGT, but there are some important exceptions (eg. gains in disposal of UK assets used to carry on a trade, profession or vocation in the UK).
Purchasers of commercial property can benefit from the added advantage of a potential 75% Capital Gains Tax exemption. This can be achieved after owning a commercial property for just two years (a potential 50% exemption applies if you sell between one and two years after purchasing the property).
VAT is a hugely complex tax and is often subject to changes and interpretations, so you will be wise to check with your own tax advisor concerning your liability.
Many of the costs incurred by investors in UK real estate will be liable to UK VAT at 20%, including legal, architects and survey fees, estate agents charges and other professional costs. While the letting of residential accommodation is, in almost all cases, not subject to VAT, the VAT paid on those costs is not generally 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 tax is a form of death duty and without tax planning in advance you could leave your beneficiaries with unnecessary tax bills and unnecessary money being grabbed by the tax man.
The value of estates above the threshold (currently £325,000 for tax year 2017 to 2018) is taxed at 40% unless it is left to a spouse, civil partner, a charity or community amateur sports club.
Should you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold of ZERO Inheritance Tax will increase to £425,000.
If you’re married or living in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means the combined threshold can be as much as £850,000.
Although, with a 40% rate on death and a 20% rate on lifetime transfers, Inheritance Tax is at first sight a significant amount. Various tax reliefs and exemptions are available which, properly used, can greatly reduce, if not remove, its impact:
Some investors consider owning any UK property through the medium of a non-UK registered company for Inheritance Tax purposes, while being subject to any tax considerations in their non-UK home territory.
Although Stamp Duty hasn’t yet reached the levels found elsewhere in Europe, it is nevertheless a significant cost when purchasing most UK property. Duty is charged at the following rates:
The main form of local property taxation in the UK, Council Tax, is charged on domestic property and is collected by the local authorities. Generally, the higher price, the greater the tax will be.
Valuation Bands: Each local authority keeps a “Valuation List” of all the domestic property in its area. Property values are assessed annually and put into a valuation band with a corresponding charge. The English valuation bands are:
Not everyone will have to pay the full amount of council tax. There are three circumstances when your council tax bill may be reduced:
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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