Buying property in the UK is a complex and time-consuming process that comes with additional costs and taxes. In this article, we talk about the aspects of taxation in the UK in relation to purchasing, owning and selling a property.
All information presented here describes the situation as of July 2022. In this article, we cannot and do not attempt to cover all possible taxation options associated with property in the UK. It is important to understand that this is an overview, and for a clearer explanation, we recommend contacting solicitors, tax advisors or the HMRC website, where you can find lot of useful information.
TAXES WHEN PURCHASING A PROPERTY
Stamp duty (Stamp Duty Land Tax (SDLT)). This tax has its roots in paper excise stamps used in the UK hundreds of years ago. In its current form and name, it was introduced in 2003, and its residential rates have experienced several revisions and upgrades: in 2014, 2016, and most recently in 2021. You pay this tax if you buy a property or land worth over £125,000 in England and Northern Ireland. In Scotland and Wales, the rules are slightly different. The Stamp Duty rate is progressive and depends on whether you already own a home (in the UK or elsewhere in the world), whether you are a resident of the UK and other factors.
When calculating this tax, there are many nuances: there are exempts for first-time buyers of homes worth less than £500,000, and there are differences in its calculation when buying a leasehold. If this is not your first home, then you will have to pay an additional 3% on top of the amount that the first home buyer will pay. But if you sell your previous home at the same time, and the new home becomes the only one, then the tax paid can most often be returned within 36 months after the transaction.
In short, there is a base Stamp Duty tax rate for residential properties. There are two additions to it if:
- You are a UK non-resident: +2%
- You own any property anywhere in the world: +3%
Often our clients ask us whether a property is considered your property in relation to this tax if it is registered in the spouse’s name. The answer is yes, it does. This rule does not apply to other relatives. It also doesn’t matter if the property you already own is your main residence or a vacation home. Anyway, you are considered to already own the property and are liable to pay an additional 3% of Stamp Duty.
We are also asked what it means to be a non-resident of the UK. This is also a complex topic, and solicitors will always advise you better on it. Residency does not depend on your visa status and whether you have lived in the UK before or plan to come again. You are not resident for the purposes of calculating this tax if you spent less than 180 days in the UK during the year prior to purchase. In this case, you will have to pay +2% to the base Stamp Duty tax rate. If you bought a property, paid the tax and became a resident within 12 months after the purchase, then you get a refund for this additional 2% of the tax.
We have summarised the most important information for you in this table:
|SDLT rate on residential properties|
|Стоимость недвижимости||UK resident, the only property anywhere in the world||UK non-resident, the only property anywhere in the world||UK resident, owns a property anywhere in the world||UK non-resident, owns a property anywhere in the world|
|Up to £125 000||0||2%||3%||5%|
|The next £125,000 (the portion from £125,001 to £250,000)||2%||4%||5%||7%|
|The next £675,000 (the portion from £250,001 to £925,000)||5%||7%||8%||10%|
|The next £575,000 (the portion from £925,001 to £1.5 million)||10%||12%||13%||15%|
|The remaining amount (the portion above £1.5 million)||12%||14%||15%||17%|
Since the effective rate is calculated on the accumulated amount, it will differ depending on the value of the property. To calculate the Stamp Duty Tax for your specific case, use the HMRC calculator.
We are also often asked how to confirm that you already own a property and whether HMRC can check this. We answer: solicitors and HMRC will by default rely on your declaration. But if you knowingly provided incorrect information, and this is revealed, you can face high fines and problems with the law.
For the Stamp Duty Tax, you transfer the entire amount to your solicitors, and within a month after the closing of the transaction, they are obliged to pay it on your behalf.
This tax has many more nuances for each specific case. For example, we wrote in detail about such a rarely used form of its return as a benefit for multiple dwellings. By knowing about it, we were able to save the client £55,000 a few years ago.
COST OF OWNERSHIP
Property ownership by individuals
As we have mentioned in other articles, there is no current annual property tax in the UK. Therefore, the cost of ownership here is lower than in many large cities of the world: New York, Hong Kong, Vancouver, Madrid.
There is no ownership tax for individuals, but if you own an apartment, you will need to pay a Service charge and Ground rent (fee for renting a share of land in case of leasehold). There is no Service charge and Ground rent fn you own a house with a freehold property type. Also, those who live in an apartment or house pay Council Tax (depending on which Borough the building is located in) and utility bills.
Ownership of real estate through a company
Previously, buying a property in the name of a company was a popular way to minimize taxes. This method had two advantages:
- It was possible not to pay SDLT for the purchase. When buying and selling a residential property, the shares of the company were bought and sold, not the property itself.
- It was possible to avoid getting the name of the buyer in the public registers of property owners in the UK.
But now both of these advantages do not work.
First, to combat the avoidance of SDLT, in 2013 the Government introduced a new tax for companies – Annual tax on enveloped dwellings (ATED). It is payable if you own a property worth more than £500,000 through a company and live in it yourself. But if you own a company which nature of business is to let this property, then ATED is not paid. The annual amount of ATED tax payable depends on the market value of the property and usually amounts to quite substantial several thousand pounds per year. Therefore, buying properties in the name of a company has become much less profitable.
Secondly, since the beginning of the 2010s, it has become almost impossible to cover your tracks with the help of the company. The company, just as before, either buys and sells shares, or buys and sells property itself. But buyers are now required to disclose information about the ultimate beneficiaries. The deal will list all the real owners of these companies, otherwise, it will not pass due diligence.
Also, in the case of property ownership by a company, annual expenses for managing the company are added. And if the property has increased in value during the period of ownership, then the sale incurs a Capital Gains Tax. Previously, you did not need to pay CGT if the company was registered outside the UK. Since then, the legislation has changed, and now even a foreign company is obliged to do so.
In the UK, there is no separate tax on the sale of real estate property but there may be a Capital Gains Tax (CGT). It must be paid if the property has increased in price during your ownership. To do this, when selling, you will need to make an assessment of the market value – either independently or with the help of appraisers. Next, you file your tax return and indicate this estimate. You then need to be prepared to explain how this estimation was obtained. The CGT rate depends on the taxable amount – the profit you got (if you had any). It differs for individuals and companies.
Sometimes CGT can be deducted from the cost of improvements made to the property during ownership. These expenses may include consultants and legal fees, general improvements such as building extensions or garages, and some taxes.
If you are not a resident of the UK but are selling a property located in the UK, you still have to pay CGT. The rate depends on many factors. But there are different possibilities to get tax exemption. For example, you lived in this house for 90 days a year, but did not rent it out for the rest of the time, did not use it entirely for doing business, and its size does not exceed 5000 square meters.
For sellers who have let their residential property, separate rules apply for calculating this tax.
You can calculate your Capital Gains Tax with the HMRC calculator.
Another point to consider when buying a property in the UK is the high Inheritance Tax (IHT). If you pass on property to your children, they will very likely be required to pay this tax. The rate can reach 40%. To avoid this, many give the property to children as a gift in advance: if this is done 7 years before death, then the tax is not being paid. You can also place the property in a trust or buy Inheritance Tax Life Insurance, but usually, this insurance is expensive. We advise clients to properly prepare a personal financial plan and, if necessary, seek advice from financial advisers.
To sum up, there is a huge number of nuances in British tax law, and each specific case should be considered separately. We at AZ Real Estate work in partnership with trusted professionals and qualified solicitors who help our clients organize the correct tax planning when buying and selling properties.
Published 22 July 2022