Paul Falvey, a tax partner at accountancy and business advisory firm BDO LLP, says most people who are looking to purchase a property are aware that they may have to pay stamp duty but, whether you’re buying your first house, a commercial property or a holiday home, there are many more taxes to consider.
The UK tax system is complex and complicated. People and businesses are crying out for across-the-board tax simplification.
However, until that time comes, people need to be aware that there are at least eight taxes that buyers should consider before purchasing a property.
Complex: The UK tax system is complex and complicated. People and businesses are crying out for across-the-board tax simplification
The rules can be confusing and are different for residential and commercial properties.
They also vary depending on where the owner is tax resident. In recent years new rules have been introduced to increase the tax paid by foreign owners. This has had the effect of dampening down property inflation, particularly in high end London residential properties.
Here is a short summary of the taxes you face when purchasing a property in the UK.
1) PROPERTY TRANSFER TAXES
Usually known as stamp duty (SDLT in England and Northern Ireland, LBTT in Scotland and LTT in Wales).
When a property is transferred from one person to another, stamp duty will be payable by the purchaser.
The rate changes depending on whether it is freehold or leasehold, whether it is commercial or residential and what country it is in.
Stamp duty: When a property is transferred from one person to another, stamp duty will be payable
The rates of SDLT on residential properties range from 2 per cent to 15 per cent and can include a surcharge for second homes – this is often cited as one of the reasons for the decline in buy to let properties.
2) INHERITANCE TAX
The significant increase in property prices has brought many more owners into the inheritance tax net.
When a property is passed down, most typically following a death, Inheritance Tax is incurred. This will usually be payable on the second death (as most estates are left to the surviving spouse).
George Osborne introduced an additional tax allowance for family homes when he was chancellor but this operates in a complex way and is not always available.
Although VAT is not generally payable on purchases of residential property, home improvements are subject to VAT in the vast majority of cases. Major improvements such as loft extensions or adding on rooms will incur a significant VAT charge as the builder will have to add on 20 per cent to his costs.
4) CAPITAL GAINS TAX
Your main home is often exempt from capital gains tax, but second homes and holiday homes are not. For many years non-residents did not pay capital gains tax: this has changed and residential property gains are subject to this tax. The Government has announced that it plans to increase this tax to all types of UK property from 2019.
5) ANNUAL TAX ON ENVELOPED DWELLINGS
For many years the UK was a very benign place for foreign investment in property and it was relatively simple for non-residents to legally avoid tax.
One of the ways this was achieved was to hold property via a company often registered outside the UK.
This has changed: residential properties valued at more than £500,000 and which are not owned by individuals, for example properties owned by companies (either UK resident or non-UK resident), can be charged ATED.
Times change: For many years the UK was a very benign place for foreign investment in property and it was relatively simple for non-residents to legally avoid tax
ATED is charged at an annual amount at progressive rates determined by the property value.
There are a number of exemptions for this, such as property rental businesses. Where an actual charge to the ATED arises, higher rates of capital gains tax can apply to gains arising on the disposal of the property.
6) COUNCIL TAX/BUSINESS RATES
Depending on where you live in the UK, your home is subject to council tax. Although the tax is used by local authorities to raise funds to meet the cost of local services in the area for which they have responsibility, it is nonetheless charged on the value of property.
In the case of commercial property, this is implemented through a charge to business rates which is calculated by reference to the value of the property and a multiplier determined by the size of the business.
All of the above taxes apply to properties which are owner occupied. If you receive rent for your property, there are additional taxes to consider.
7) INCOME TAX
If you let your property you need to consider income tax, this applies to both residents and non-residents.
If you are a non-UK resident, individual or company renting in the UK, you are subject to UK income tax on the profits of your trade/property rental business.
The loan interest deduction rules for buy to let investors are changing – the effect will be that in some cases owners will pay tax on ‘income for tax purposes’ that is greater than their real income.
8) CORPORATION TAX
UK resident companies are chargeable to UK corporation tax on the profits of their property trade/property rental business.
Paul Falvey is a tax partner at accountancy and business advisory firm BDO LLP
This law is expected to change to include non-UK resident companies letting UK property from April 2020. Currently, non-UK companies pay income tax on their rent.
Property ownership is highly taxed; this is not surprising given that property is easy to identify, difficult to hide and most often very valuable.
Property investors sometimes overlook the amount of tax they will pay over their lifetime (or sometimes beyond) of their ownership of property.
Even your main home is not completely tax free as you will almost certainly have paid stamp duty, will incur VAT on home improvements and maintenance and your heirs could also pay inheritance tax.