Understanding Property Tax

When it comes to buying or selling a property, fine print such as Stamp Duty may be the last thing on your mind. However, it’s important to understand the tax implications of your purchase or sale, as these associated costs can have a bigger financial impact that you may be aware of. 

Buying a property

When you buy a property, there are a number of costs that you may not have factored into your calculations, such as your deposit, conveyancing fees, survey costs, mortgage fees and, in the UK and Northern Ireland, Stamp Duty Land Tax (SDLT). 

Stamp Duty – What is it? 

A stamp duty is a tax levied by governments on legal documents and usually involves the transfer of real estate or other property. Governments can levy stamp duty on documents required to legally record these types of transactions, as well as documents representing marriages, military contracts, copyrights, patents, etc. Historically, stamp duties have been a means for governments to raise funds to finance their activities. 

Stamp duty is thought to have originated in Spain in the early 17th century and was known as “stamp duty” because a physical stamp was affixed to the document to prove it was officially registered and the debt tax was paid.

What if I live in Scotland or Wales? 

In Scotland, stamp duty is now known as the Land and Property Transactions Tax (LBTT) and is largely based on the existing SDLT regime. In Wales, stamp duty is called Land Transaction Tax (LTT) for short. Wales introduced their own system from April 2018. Although the basic concept of land transfer tax is the same as stamp duty – it is a tax levied on the purchase of real estate – both how it works and the tax rates are different.

How is SDLT calculated?

SDLT is a progressive tax paid, meaning the amount you pay is based on thresholds and dependent on a property’s price. Different SDLT rates and thresholds apply to non-residential property or mixed use land.

The current SDLT rates for residential properties are: 

You pay stamp duty at these rates if, after buying the property, it is the only residential property you own. You usually pay 3% on top of these rates if you own another residential property.

So how would this look on a freehold property bought for £295.000 (the current average price for a home in England), intended to be your main residence? 

You’d pay £4750 in SDLT, using the following breakdown. 

• 0% on the first £125,000 = £0
• 2% on the next £125,000 = £2,500
• 5% on the final £45,000 = £2,250

As you can see, these aren’t small amounts of money, so make sure you’re accounting for them in your calculations. 

What if I’m a first-time buyer? 

If the property you’re buying is your first home you can claim a discount. This means you’ll pay:

• no SDLT up to £300,000
• 5% SDLT on the portion from £300,001 to £500,000

You’re only eligible for this discount if you and anyone else you’re buying with are first-time buyers, and the property is under £500,000, otherwise you have to pay the same as people who’ve bought a home before.

I’ve inherited a house – do I still have to pay Stamp Duty? 

If you’ve inherited a house then you won’t be liable for SDLT, Inheritance tax (or IHT) may be payable depending on who a property has been left to. There is nothing owed if it’s left to a spouse or civil partner, but if the estate has been left to other people or relatives and is above a particular size, tax then becomes payable. Generally, the allowable threshold is £325,000, and after that threshold has been reached, everything else is taxed at a rate of 40%, however these thresholds may vary depending on how many people are named as beneficiaries.

The executor of the will is responsible for paying Inheritance Tax and it will normally be paid from money within the estate (or funds raised by selling assets within the estate).

Paying inheritance tax can be incredibly complicated if you’re the executor and the beneficiary. HMRC require that IHT is paid within six months, but as mentioned before, probate can take a lot longer than that. Furthermore, probate is generally only granted (and therefore assets released) once IHT has been paid – something of a paradox! There are a number of solutions available to pay the IHT obligation, but it’s best to speak to a tax adviser to find out what your best options will be.

Take a look at our previous blogs that take a deeper dive on understanding IHT. 

Selling your property

If you’re selling a property you may have to pay Capital Gains Tax if you make a profit (‘gain’) when the property you sell (or ‘dispose of’) isn’t your home. This type of property can include: 

• buy-to-let properties
• business premises
• land
• inherited property

Capital Gains Tax – what’s that? 

Capital Gains Tax is the tax on any profit when you sell something (an ‘asset’) that’s increased in value.

You’re taxed on the profit you make, not the amount of money you receive. So for example, if you bought a painting for £10,000 and then sold it for £25,000, you’ve made a profit (‘gain’) of £15,000 (£25,000 minus £10,000).

Do I definitely have to pay it? 

You don’t have to pay Capital Gains Tax when selling a property if all of the following conditions apply:

• ♣ you have one home and you’ve lived in it as your main home for the entire time you’ve owned it
• ♣ you have not let part of it out – this doesn’t include having a tenant
• ♣ you have not used a part of your home exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use)
• ♣ the grounds, including all buildings, are less than 5,000 square metres in total
• ♣ you didn’t buy it just to make a profit

If all these apply you will automatically get a tax relief called Private Residence Relief and will have no tax to pay. If any of them apply, you may have some tax to pay.

How is Capital Gains Tax calculated?

You pay a different rate of tax on profits from residential property than other assets.

If you’re a higher or additional rate taxpayer you’ll pay:

• 28% on your gains from residential property
• 20% on your gains from other chargeable assets

For basic rate taxpayers, the rate depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

We know this is complicated, but you needn’t try and figure it all out by yourself. If you’d like advice on dealing with the tax matters around buying and selling a property, get in touch today – we’re here to help!