The process of paying off your home can be long and arduous and in financially leaner times, be stressful. As you near that long-sought-after prize of homeownership, you may be wondering why you are still required to pay property taxes if you own your home outright.
This is a logical question and one that has many UK residents searching for answers. While there is no “property tax” in the UK like there is in Canada, Australia or other countries, there are taxes that are used for similar purposes and that most people residing in the UK are required to pay.
What Do Property Taxes Pay For?
As is often quoted, the only two “unavoidables” in life are death and taxes. Since this seems to be true, one would at least hope that the taxes that you are required to pay (income taxes, property taxes, sales taxes) are doing some good in the hands of the government and are making a difference.
Although there is no specific “property tax” in the UK, there are many taxes that are levied against homeowners. Not all this tax revenue is easily traceable as it is used to fund the government’s many departments. When it comes to “property tax” and what it is used for, the allocation of council tax is the easiest to trace.
Council tax is a local tax, paid on a sliding scale based on the value of the home or residences in the area. What are these taxes used for?
- fire and police services
- leisure and recreation projects, such as maintaining parks and sports centres
- schools, libraries, and education services
- recycling and waste collection and disposal
- street cleaning, lights, road maintenance and all other transport and highway services
- environmental health and trading standards
- certificates for marriages, deaths and birth, local elections and all other administration and record-keeping services
Taxes Paid by Property Owners in the UK
When there is a land transaction involved in England or Northern Ireland, there will be SDLT to pay. There are exemptions, such as where you buy your property, if it is your first home and the purchase price.
Council tax is used to pay for local services and is determined based on the people living in your home, the value of your residence and other factors.
This tax applies to property and assets that are transferred to another after the death of a person. Exemptions apply here as well, such as whether it is left to a spouse or civil partner, a charity or if it is under the threshold set by the HMRC
CGT is meant to be applied to any financial gains made on a property or asset from the time it was purchased to the time it was sold. If you buy a property and sell it for a higher price, you may be required to pay capital gains, though there are exceptions for this tax as well.
SDLT for those that are buying a second home is subject to an “additional property” tax that tacks on an additional 3% to the appropriate SDLT tax rate.
Are You Required to Pay Taxes After You Own Your Home?
Yes! Unfortunately, various forms of taxation will continue to be a part of your life as a homeowner, regardless of if you or the bank own the deed to the property. Certain types of tax, like council tax, can be reduced for a number of factors. Check with your local authorities to see what you could qualify for.
Tax Relief for Homeowners
- Annual Exempt Amount
For those who may have to pay capital gains tax, there is an annual exempt amount that all UK citizens receive which is £12,300.
- Council Tax Reduction or Exemptions
Many factors may make you eligible for relief or exemption from council tax in your area. People in your home may be considered “disregarded” if they are:
- under 18 years old
- on certain apprentice schemes
- 18 or 19 years old and in full-time education
- a full-time studentat college or university
- under 25 years old and get funding from the Education and Skills Funding Agency
- a student nurse
- a foreign language assistant registered with the British Council
- severely mentally impaired
- a live-in career for someone who is not your partner, spouse, or child under 18
- a diplomat
You may also qualify for a reduction in your council tax if you meet other criteria. What are these criteria?
- You will receive 50% off of your council tax if everyone in your home is “disregarded”.
- You will receive 25% off if everyone in the home outside of yourself is considered “disregarded” or if you live on your own.
Private Resident Relief
According to the HMRC, you are not required to pay Capital Gains Tax if all of these areas apply to your situation:
- you’ve lived in it as your main home for all the time you’ve owned it
- you have not let part of it out or used part of it for business only
- the grounds, including the buildings, are smaller than 5,000 square metres (just over an acre)
This is the Private Resident Relief and is automatically applied, exempting you from Capital Gains if you meet the criteria.
Why Are You Charged Property Tax After You Own Your Home?
The revenue that these taxes generate for the government is used to fund its operations. Whether it be the council tax that funds the local services or the SDLT that gets absorbed into the HMRC tax revenue, these programs and departments need funding. Real estate and property are easy targets for taxation because they are easy to assess, regulate and enforce. After all, real estate and property don’t move. They are always there, in the same spot, in plain sight.
As a source of taxation revenue, the issue of ownership of the land or property does not factor into the government’s decisions. Buildings, residential properties, flats, and all other forms of property are fair game for property taxes as those taxes are to be used for the good of the people.