Compared to other countries, UK property taxes are both costly and unnecessarily complicated. Also, in some cases, taxpayers end up paying what is effectively double taxation.
According to OECD data, the amount of property taxes which are paid in the UK have gone up by £19.9 billion since 2010. Their research also showed that combined, these property taxes make up 12.5% of all tax revenues, which is more than double the OECD average of 6%. British householders also pay more property taxes as a percentage of GDP than anywhere else in the world. In this article, we look at 7 property taxes in the UK. You’ll be able to read about:
- Council tax
- Business rates
- Stamp duty land tax
- Inheritance tax
- Capital gains tax (CGT)
- Income tax
- Value added tax (VAT)
Council tax is paid by all adults of 18 or over who rent or own a house. The tax is usually divided into 10 equal instalments and can be paid online. The revenue raised from council tax is used to fund essential services in the area and wider community.
Each residential property is allocated a band from A-H according to the price of the property. Its valuation band may be changed if there are modifications in the property’s purpose or its structure, or if there are new developments in the area. Residents can contact the Valuation Office Agency if they believe that their property has been put in the wrong band.
The price of council tax varies from place to place as it depends how much the local authority charges. There are a number of discounts and exemptions. For example, tenants or owners who live alone receive a 25% discount whilst some groups like full-time students, the disabled and their carers are exempt.
Like council tax, business rates are paid to the local authority in monthly instalments to cover council services. They are paid for all non-residential or commercial property such as shops, offices, etc. although there are exemptions. For instance, if you work from home, you don’t usually need to pay rates if your business is run from part of one room. The amount that is paid depends on the property’s ‘rateable value’ which is given to the property by the Valuation Office Agency according to its annual market rent, and is reviewed every 5 years.
Stamp duty land tax
In England and Northern Ireland, Stamp Duty is paid when a property is purchased. The Land & Buildings Transaction Tax in Scotland and the Land Transfer Tax in Wales work similarly to stamp duty although there are different thresholds. These property taxes must be paid within 30 days of the completion date of the sales transaction, and is often handled by the legal representative dealing with the property purchase (although the homeowner is legally liable for making sure it’s paid). The amount paid for SDLT depends on the value of the property and to a certain extent the buyer (whether it’s a first-time buyer or whether the buyer has other property).
For properties worth under £125,000, there’s no ownership transfer tax, but the amount gradually increases from 2% of the purchase price for properties over this sum to 12% for any house worth over £1.5 million. If the owner already possesses property in their name there’s a 3% surcharge while first-time buyers have reduced rates and don’t pay anything for homes worth under £300,000.
Spouses or partners pay no inheritance tax when receiving property in a will. The tax-free threshold for children and/or grandchildren who are beneficiaries of property is £450,000 although they don’t have to pay stamp duty, income tax or capital gains tax.
Capital gains tax (CGT)
Capital Gains Tax is the tax paid on the profit made when selling an asset such as property (rather than on the value of the property itself). If you sell your main residence, then you’re exempt from paying CGT. However, this doesn’t apply for second homes (such as holiday homes) or buy-to-let properties.
Capital Gains Tax is the tax paid on the profit made when selling an asset such as property.
The amount that you’ll pay depends on the size of your profit, your tax rate and your taxable income from employment, etc. It’s possible to deduct any expenses arising from the buying/selling of the property (such as legal fees, stamp duty and so on) from the amount owed.
If you rent out property, then you have to pay income tax on the rents collected. This can only be done through a self-assessment tax return rather than through the PAYE system. The rates you pay depend on which type of taxpayer you are (basic, higher, etc.) and your total income from all employment, pensions, etc. You are allowed to deduct expenses from the rents such as money paid for running and maintaining the property. Although landlords used to be able to receive tax relief on property-associated expenses, this is slowly being phased out from 2017-20.
The government’s Rent a Room scheme allows homeowners to earn up to £7,500 a year (or £3,750 for joint owners) tax-free when renting out a room to a lodger. Once this threshold has been passed, the owner must complete a self-assessment tax return as well.
Value added tax (VAT)
Although VAT isn’t paid on property purchases, it is paid by anyone who wants to have some home improvements done or an extension built. As VAT is indirect taxation, you won’t receive a demand for payment, but the builder will include a 20% charge for VAT in their bill.
Conclusion – Will property taxes be simplified?
When you add all of them altogether, you can see why some people have complaints about the system of property taxation in the UK. Some believe that the whole system should be overhauled and simplified so that these different taxes are collected under one single property tax. However, property taxes are very popular ways to raise revenue since they’re difficult to avoid. This makes their collection rates high compared to other forms of direct and indirect taxation. As a result, it’s doubtful whether it’s in the government’s best interests to make changes.