Over the past few years, the UK government has been more focused on levying taxes on residential property. Although it adds to the complexity tied to the taxation system, the UK property market is lucrative and attracts optimistic overseas buyers in large numbers.
It is best to keep yourself abreast with all tax-related information if you are considering owning property in the UK. While solicitors should be the ones you turn to for finalisation, let’s take a quick look here at the taxes you need to be aware of.
What are the property-related taxes in the UK?
Property investment is a huge financial commitment. It is important to familiarise yourself with and keep in mind the taxes that are involved in the process.
- Stamp Duty Land Tax
SDLT is applicable for the purchase of property in England and Northern Ireland. The kind of property and its value determines the rate that would be applicable. The rate varies based on the various band values.
For first-time residential property buyers, tax is exempted till £425,000 (from the previous £300,000 as per the tax reduction update announced in September 2022). For other buyers, the no-tax threshold has increased to £250,000 (from the previous £125,000).
The tax band varies for owning property in Scotland and Wales. Self-builders are exempted from stamp duty on building costs but still have to pay duty for land.
SDLT is applicable on the sale and transfer of property.
- Income tax
Income tax is levied on income from a property. The relief limit is up to 20%, and landlords can deduct only actual incurred costs. Landlords can deduct the following costs before calculating the tax.
– Mortgage interest
– Insurance premium
– Council tax
– Maintenance and utility bills
– Agent
Non-resident landlords in the UK (who own property here but reside outside the country) can be individuals, companies or even trustees. In a partnership, each person becomes a separate landlord with respect to his or her share in the rental income.
- Capital Gains Tax
CGT is applicable on gains from selling or disposing of a property. Costs related to improvements and maintenance during the ownership of the property can be deducted before calculating CGT. This includes the cost of advice received, building extensions and garages, some taxes etc.
Essentially, the total gain is the difference between the sale value and the original purchase cost. And when selling a property, the sale value is usually the sale price.
- Annual tax on enveloped dwellings
ATED was initiated to discourage indirect property ownership, for example, via a company, to avoid taxes. If a company owns residential property valued £500,000 and more, it is required to pay ATED returns. The applicable amount is calculated on the basis of property value.
- Inheritance tax
IHT is levied on the property of a deceased person. It is applicable when the estate value is more than £325,000. It is not levied if assets beyond £325,000 are left to a spouse or charity. The standard IHT rate is 40% and is charged on the amount above the threshold.