Understanding your UK property taxes

Overseas Property | 19 Mar 2020

In addition to paying attention to a property's condition, location and price, taxes are also an important matter for those investing in the UK.

After the deduction of taxes, rental income may be greatly reduced. The following six property taxes are ones UK property buyers may face:

1) Stamp duty land tax. The current SDLT threshold is 125,000 pounds (HK$1.26 million) for residential properties and 150,000 pounds for non-residential land and properties. The rate is 2 percent for property prices from 125,001 pounds to 250,000 pounds; 5 percent for 250,001 pounds to 925,000 pounds; 10 percent for 25,001 pounds to 1.5 million pounds; and 12 percent for 1.5 million pounds and above.

First-time homebuyers are eligible for different tax breaks. In England, the first 300,000 pounds will be exempt from the SDLT for properties under 500,000 pounds. In Scotland, the SDLT can be waived if the property price is under 175,000 pounds, while the cap is 180,000 pounds in Wales.

An additional rate applies for second homeowners, starting from 3 percent for the first 125,000 pounds, 5 percent for the next 125,000 pounds and so on.

2) Value-added tax. VAT is levied on most goods and services provided by registered businesses in the UK. During the transaction, buyers have to pay a 20 percent VAT to almost all legal and accounting services.

3) Council tax. Council tax is collected by the local government for services in the community, such as libraries, schools and security. The amount payable is determined by which of the eight (England and Scotland) or nine (Wales) bands the property is allocated to, depending on value. The council tax is usually about 1,000 pounds per year.

The tax is levied on the residents instead of the owners. Households where all occupants are full-time students do not have to pay the tax, while owners may also pay less if the property not their main home.

4) Income tax. UK residents and foreign investors must pay an income tax on any profit they make from renting out property. The standard personal allowance - the amount of income landlords do not have to pay tax on - is 12,500 pounds. A basic rate of 20 percent is collected for an income of 12,501 pounds to 50,000 pounds; a higher rate of 40 percent for 50,001 pounds to 150,000 pounds; and an additional rate of 45 percent for an income more than 150,000 pounds. Income tax bands are different in Scotland and are divided into five bands.

Owners may be able to get income tax reliefs for expenses such as property management fees, council tax and utility fees.

5) Capital gains tax. The CGT is a tax on the profit from the sale of an asset, such as property and land, that has increased in value. The gain made is taxed but not the amount of money received. Owners need to pay the CGT when letting out a flat.

The CGT allowance is 11,300 pounds and the rate depends on one's income tax band. Basic rate taxpayers will pay 18 percent CGT on residential property, while higher rate taxpayers will pay 28 percent.

6) Inheritance tax. Inheritance tax is the tax on the estate - including property, money and possessions - of someone who has died. There is normally no inheritance tax if the value of an estate is below the 325,000-pound threshold. A flat rate of 40 percent will be charged on the part of the estate that is above the threshold. A reduced rate of 36 percent can be paid if 10 percent of the estate is donated to a charitable organization.

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