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.
Capital Gains Tax 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.
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 17.5%, 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 £300,000 for tax year 2007 to 2008) is taxed at 40% unless it is left to a spouse. 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.
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:
- Gifts need to be given seven years before your death
- Each spouse should use their quota of 285,000 GBT tax-free threshold
- A discretionary trust could be set up
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:
|Property price||Stamp Duty|
|60,000 - 250, 000 GBP||1% of total purchase price|
|251,000 – 500,000 GBP||3% of total purchase price|
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:
|Valuation band||Range of values|
|A||Up to £40,000|
|B||Over £40,000 and up to £52,000|
|C||Over £52,000 and up to £68,000|
|D||Over £68,000 and up to £88,000|
|E||Over £88,000 and up to £120,000|
|F||Over £120,000 and up to £160,000|
|G||Over £160,000 and up to £320,000|
Not everyone will have to pay the full amount of council tax. 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.