What Property Taxes do you have to Pay?

Published on May 12, 2015 by John Stringer in Buying, News, Property Investment

Property is big business in the UK, with many people purchasing homes for themselves and many others buying property to rent out to others. The purchasing process can be a daunting one, particularly for those who have not been involved with buying property in the past.

There is a lot to think about when you are buying a house in the UK, ranging from how much you can afford to spend on buying a property through to the location of the house, the type of property you buy, and what other costs will be involved.

One of the other things that you have to think about is the taxes that are involved when it comes to property, as these can be quite complicated and can vary based on your situation. For instance, there are property taxes that have to be considered when you buy a property, when you inherit one, when you sell one and when you rent one out. Being aware of these different taxes will make the process more manageable and far less daunting, as you will have a far better idea of what to expect and what sorts of taxes you are obligated to pay.

Some of the property taxes you may be obligated to pay

There are various different types of property taxes in the UK, and the ones that you are expected to pay will be based on your circumstances and situation. Some of the property taxes that are in force at the moment include:

Stamp Duty Land Tax (SDLT)

When you purchase a UK property in the UK that is over a specified value, you will have to pay Stamp Duty Land Tax. If the property or land you purchase is £125,000 or less, you will not have to pay this tax at all. Likewise, if the property or land costs more than £125,000, you will still pay nothing on the first £125,000 but you will pay the tax on all amounts over and above this figure. Rates are 2 percent on the next £125,000, 5 percent on the next £675,000, 10 percent on the next £575,000 and 12 percent on the remainder. This tax is therefore charged on a tiered system and the more the property or land is worth, the more you will be required to pay. This is something to bear in mind if you are purchasing a property, as you can then determine whether you will be subjected to stamp duty on your purchase.

Capital Gains Tax

Another type of tax that you may be subjected to is Capital Gains Tax, which is tax on any gains that you make on an asset such as your property. However, this tax is not normally charged on profit from your only home or main home, as these are normally subject to private residence relief. However, you may have to pay this type of tax on any gains made on your property:

if you develop your property,
you use part of the property just for business,
you rent out all of part of the property,
you live away,
you purchased the property for the purpose of making a profit,
or you improved the property in order to make profit.

Income tax

This type of tax may apply to you if you own a property that you then rent out as a landlord, as you will then be classed as earning an income from the property. This means that the money that you make from rental payments from your tenants will be subject to income tax in the UK, which is something that you need to bear in mind when entering into the property investment field as well as when you set the weekly or monthly rent for the property that you are going to be renting out. The rate of income tax charged may be up to 45 percent, although deductible expenses are taken into consideration such as managing agent fees, repair costs, insurance coverage, and maintenance costs. You may also have to pay income tax on the sale of a development property rather than paying Capital Gains Tax, which is where the property was developed or renovated and then sold in order to make a profit quickly.

Inheriting a Property

If you inherit a property, you won’t normally pay any property taxes when you inherit it, although this will depend on various factors such as whether the estate of the deceased is able to pay any taxes due from the estate. However, if the inheritance then means that you own two properties – your own home and the inherited one – you will need to decide which one you want to class as you main home and inform HMRC so that appropriate taxes can be charged in the future, such as if you sell one of the properties. You need to inform HMRC of your decision within two years of inheriting the property otherwise, if you do sell one of the properties, they will decide themselves which is classed as your main home.

Inheritance tax

If you own a property over a certain value, you may have to pay inheritance tax on it upon your death, with properties generally being subjected to IHT at a rate of 40 percent. However, there is also a NIL rate band, which means that the first £325,000 is exempt from this tax. Therefore, if your property is valued at less than this amount, there will be no inheritance tax to pay.

Familiarising yourself with property taxes in the UK

It is always a good idea to familiarise yourself with the various property taxes in the UK whether you own, plan to buy, rent out, or are considering developing a property. This will enable you to make more informed decisions and take the best route possible in order to minimise on the level of property tax you have to pay. It also means that you can be more prepared, as you will have a far better idea of what sorts of UK property taxes you may be subjected to based on your situation.