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Understanding the basics of property tax while investing in any property in the UK is very important. After all, the UK is known to be very strict with their taxes and any default in tax payment, be it conscious or unconscious, can lead to a hefty penalty. Property owners have to pay a variety of taxes, starting with the stamp duty tax on the purchase of property, capital gains tax on the sale of a property, income tax on rental income received as well as inheritance tax, if applicable. Investors need to understand the basics of these 4 property-related taxes. With that being said, it is always a good idea to get in touch with a financial expert to help you file your taxes to ensure the paperwork is correct and seamless.
Capital Gains Tax
If you are a higher-rate Income Taxpayer in the UK, then you will have to pay 28 per cent as the capital gains tax on the sale of your home. If you are a basic rate Income Taxpayer in the UK, then you only have to pay 18 per cent of the total value of your taxable income. Say you are selling your home in York, then incurred expenses such as the fee of the estate agents in York, conveyancing costs and solicitor costs can be deducted from your total capital gains. However, mortgage costs and maintenance costs are not deducted. As of now, the annual exemption on the capital gains tax is £12,300 which will be reduced to £6,000 starting April 2023. The onus lies on the seller to report the taxable gains on the sale of his or her residential property in the UK to the HMRC within 60 days of the sale. The seller is expected to pay the capital gains tax within that given period of time. If the seller fails to do so, he or she will be liable to pay a penalty as well as interest for late payment.
Stamp Duty Land Tax
In simple words, the Stamp Duty Land Tax is the tax that is paid by the buyer while purchasing property. During the Covid-19 pandemic, the UK government introduced a temporary stamp duty holiday to boost the property market. However, as of 23rd September 2022, the Stamp Duty Land Tax is as follows. The buyer has to pay no stamp duty if the value of the property that he or she has bought is under £125,000. Properties that are valued between £125,001 to £250,000 are charged a 2 per cent stamp duty while properties valued between £250,001 to £925,000 are charged 5 per cent as the stamp duty. Properties that cost between £925,001 to £1.5 million are charged 10 per cent of the total value of the property as the stamp duty while properties costing over £1.5 million are charged 12 per cent. If the buyer or investor previously owns a property in his or her own name in the UK, then he or she will have to pay an additional 3 per cent Stamp Duty Land Tax on the purchase of the second property.
The Inheritance Tax is charged at 40 per cent in the UK. Keep in mind, Inheritance Tax is only charged on the value of the property that is above the tax-free threshold. So, for instance, if the property that you inherited is valued at £500,000 and the tax-free threshold is £325,000, then you will only be charged 40 per cent on the balance which is £175,000.
If your annual taxable income is less than £12,570, then you will pay no tax on your rental income. If your total income is over £12,570 but less than £50,270, then you are liable to pay a 20 per cent tax on your rental income. Similarly, if your annual taxable income is above £50,270 but less than £150,000, you have to pay a 40 per cent tax on your rental income. For a taxable income above £150,000, the tax to be paid on the rental income is a whopping 45 per cent. With that being said, if you receive less than £1,000 as the annual rental income then it does not need to be reported to the HMRC. If your yearly rental income is more than £1000, then you need to report it to the HMRC and fill out a self-assessment tax return.