Taxes could be one of the most challenging aspects of handling property assets. However, they cannot be avoided (most of the time). Every responsible property business owner has to know, at the very least, the basic most taxes that they need to pay.
Let me discuss the different property taxes in the UK – how they are computed and how you can possibly reduce your dues.
Stamp Duty Property Tax
Stamp Duty Land Tax or SDLT would be the first on the list. It is a tax that applies when you purchase a property in England and Northern Ireland. Scotland and Wales follow a different system.
If you buy just land intending to build on it, the SDLT will only be computed on the land value. Construction costs will be excluded.
How much is SDLT?
This will depend on several factors including the value of the property. With Stamp Duty Land Tax, the amount increases as the property price increases. The minimum is 2% and may go all the way to 12%.
However, Stamp Duty Land Tax only applies to properties with a purchase value of more than £125,000. Any amount below this is considered non-taxable.
This means if you buy a property modestly worth £225,000, then you will only need to pay 2% of the amount above £125,000:
£225,000 – purchase value
£125,000 – non-taxable amount
£100,000 – taxable amount
£100,000 X 2% = SDLT
Is there any exemption from paying Stamp Duty Land Tax?
As I mentioned above, you will only need to pay Stamp Duty Land Tax if the property you are buying is more than £125,000. However, the average price of UK properties is expectedly higher than this and therefore you would most likely not avoid it.
Still, there are certain conditions wherein you can reduce SDLT through tax relief. One example is if you are a first-time buyer.
There are select cases too when SDLT is waived such as if the property is being transferred under a will.
What happens if I buy a second property?
You can apply for tax relief if you are a first-time buyer or owner. However, if you already have a property and decide to buy a second one, then that property will be subject to SDLT and possibly with a higher tax rate.
Buying a second property to lease it out will have an additional tax charge on top of the basic SDLT. This ranges from 3% to 15% but this time around, it will only be computed from £40,000 and above. Any amount below this will not be subjected to this additional charge but still, be subject to the standard charge.
Who pays for SDLT? The buyer or the seller?
In a property sale, the Stamp Duty Land Tax is shouldered by the buyer. The seller is subject to a different type of tax.
The deadline for paying is within 30 days from the date of the sale. Make sure not to pay late or you will incur penalties.
Capital Gains Tax
You will need to pay Stamp Duty Land Tax when you buy a property, but if you sell the property later on, then you have to pay what is called Capital Gains Tax or CGT. This is a tax that applies when you resell a property after it appreciates in value after a certain period.
Transferring the ownership of the property as an inheritance or as a gift is also subject to CGT.
Learn more about property value appreciation.
How much is Capital Gains Tax?
Capital Gains Tax is computed based on the increase in the value of the property. To determine this, you simply subtract the difference between the purchase amount and the reselling price.
Currently, the CGT charge for residential property sales in the UK is 28%.
If the property you bought ten years ago was priced at £125,000 and you then sell it this year for £225,000, then your Capital Gain Tax will be 28% of the price difference:
£125,000 – purchase value
£225,000 – resell value
£100,000 – taxable amount
£100,000 X 28% = CGT
Is there any exemption from paying Capital Gains Tax?
There are certain conditions when CGT may be waived. For example, you will only need to pay this tax if the value increase is above the allowance cap which is £12,300.
Other exemption cases would be if the property was solely used as a residence from the time it was bought until it is sold. This is because Capital Gains Tax will only apply if the property was utilized for business whether in part or in full.
You can also get a CGT exemption if you transfer the ownership to a spouse or civil partner, or if you donate the property to charity.
If you are selling the property as a part of your operations as a buy-and-sell business, then you can also file for a CGT exemption. However, you are still obliged to pay Income Tax on the sale of the property.
Is there a way to reduce my Capital Gains Tax?
Capital Gains Tax can be reduced if your profit from the sale does not exceed the minimum Income Tax Tier. In such cases, your CGT charge will only amount to 18%.
Any expenditures in upgrading the property, such as for building additional facilities, are also deductible from your taxable amount.
Income Tax
Just like any hard-working citizen of the country, you will need to pay your income tax. If you are using your property to earn money as a rental business, then your profits are subject to this.
How much do I pay for Income Tax?
As of 2022, the yearly Personal Allowance set by the British government is £12,570. This means you will only need to pay income tax for profits above this threshold. The tax charge still varies depending on your total income ranging from 20% up to 45%.
If your property business generates £22,570 worth of profit for this tax year, then you will need to pay 20% of the amount above your personal allowance:
£22,570 – total income
£12,570 – non-taxable amount (personal allowance)
£10,000 – taxable amount
£10,000 X 20% = Income Tax
Is it possible to reduce my Income Tax?
If you make use of your property as a business, then you can reduce your income tax by applying for tax relief.
Expenses for certain business operations such as maintenance, utilities, agency fees, insurance premiums, and mortgage interests can be deducted from your taxable income.
Was this article helpful?
There is much more I can share with you about property investment. Get your copy of my today.
