Tax & Stamp Duty

 

Stamp duty

All residential properties bought in England and Northern Ireland are subject to stamp duty land tax if they are above a certain price (currently £125,000). If you are a first-time buyer and the property costs less than £300,000, you will not currently be liable to pay any stamp duty as long as you plan to occupy the home as your main residence. The current rates are as follows:

Property or lease premium or transfer value SDLT rate
Up to £125,000 Zero
The next £125,000 (the portion from £125,001 to £250,000) 2%
The next £675,000 (the portion from £250,001 to £925,000) 5%
The next £575,000 (the portion from £925,001 to £1.5 million) 10%
The remaining amount (the portion above £1.5 million) 12%

For property investors and second homeowners, a 3% surcharge also applies for any additional residential property, and this still applies if your main residence is outside the UK.

Multiple dwelling relief

You might be able to lower your stamp duty bill when making multiple property purchases, such as buying a set of units in a freehold block. Multiple dwelling relief allows you to apply for stamp duty to be calculated based on the average value of all the units or properties purchased in a transaction, which can lower the bill. For example, if you were to buy four properties totalling £1.2m, through multiple dwelling relief you take the stamp duty payable on the average purchase price (£300,000), which is £14,000 (including the 3% surcharge for additional properties). Multiplying this figure by four (to take into account each property) brings the total bill to £56,000. This is a significant saving on the £99,750 that would be payable on a £1.2m purchase.

Capital gains

When selling an asset, capital gains tax (CGT) might be payable on any profits made, with the exception of it being your main residential property. For property investors and those who own more than one home, there might be a bill to pay, and this will depend on a person’s total UK income and chargeable gains for the year.

Everyone gets a CGT allowance, which is currently £11,700 for an individual, or £23,400 for a married couple or civil partnership, and profits made above this rate are what may be subject to the tax. Basic rate taxpayers will currently pay 18% CGT, while higher and additional rate taxpayers pay 28% CGT on profits made from a second home sale.

A number of exemptions and tax reliefs also apply, so it is important to get advice from an accountant or tax advisor, or refer to the government’s website for further clarification on how much you might owe.

Income tax

If you rent out a property, you will probably need to pay income tax on your profits, depending how much you make and your personal circumstances. Profit is based on what you’ve got left from your rental income after taking away expenses or allowances you can claim. Changes to Section 24 of the Finance Act mean that the amount of tax relief landlords can claim on their mortgage interest payments is reducing to zero by 2020, to be replaced by a tax credit equivalent at the basic rate of tax (currently 20%). It means that landlords will no longer be able to take their mortgage interest payments into account when working out what level of income tax they need to pay.

For landlords and property investors, you need to register your profits on a self-assessment tax return to HMRC, with different ways to register depending on whether you are self-employed or a sole trader, not self-employed, or a member of a partnership. Non-UK residents must also pay income tax on any UK earnings from rental income.

Corporation tax

Investing in and trading property as a limited company rather than an individual has become an increasingly popular way of reducing your tax bill due to the Section 24 changes being rolled in. The changes only apply to individuals, rather than limited companies, and those owning properties through limited companies will be subject to corporation tax rather than income tax, which can be significantly lower. However, there are downsides to this route, one being that mortgages for limited companies tend to be more expensive and harder to obtain, while you will also have to pay for the additional accountancy costs of running a company. To decide whether this is the best route for your property investments, speak to an accountant or financial advisor.

Property tax for non-UK residents

Non-UK residents, expats and foreign nationals have to pay tax on the profits from any rental income they make from property owned in the UK. After deductibles (including things like property management, repairs and maintenance, wear and tear and insurance), the rate of income tax charged on these profits is between 20% and 45%, depending on the total amount. For any amount up to £11,850 (in 2018/2019), a personal tax allowance can be claimed meaning nothing is charged.

Whether you pay tax in your country of residence as well depends on the country’s tax agreement with the UK, so it is best to contact your local tax authority.

In the UK, all properties you own are treated as a single entity for tax purposes. Foreign investors can apply to be treated the same way as a UK resident landlords, meaning you include your calculation of rental income on an annual tax return and send to HMRC. Payments are made in two installments (31 January and 31 July), with the tax year running from 6 April to 5 April the following year.

If you do not apply to be treated as a UK landlord, your letting agent or property manager will deduct 20% from any rent collected, after expenses, and pay it to the Inland Revenue before returning your profits to you.

Capital gains tax applies to profits made from property sales in the same way as for UK residents, as does stamp duty. For more information on any of the above, speak to an expert or visit the government’s website.

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