This chapter has information about 3 different taxes, which are all related to property with explanations and advice about:
- Stamp Duty Land Tax
- The history of Stamp Duty – Its rates and how to pay SLDT
- Capital Gains Tax
- The rates for Capital Gains Tax – How to reduce your tax liability
- Inheritance Taxes – Who pays and who’s exempt
- The Main Residence Allowance
- Estate planning to avoid Inheritance Tax
Property taxation in Great Britain
In this chapter we’ve grouped together taxes which are all related in some way to property. Some people may never need to pay these taxes in their lives or they might only need to know about them in certain circumstances: Stamp Duty Land Transfer (STLT), Capital Gains Tax and Inheritance Tax. For each tax, we’ve given a concise history before explaining what they are, who has to pay and who’s exempt as well as giving details about notifying HMRC and how to pay. We also give advice on reducing your tax liability for Capital Gains Tax and Inheritance Tax.
The history of stamp duty
Stamp duty began quite literally as a tax – in the form of a stamp – which was attached to certain goods from 1694 onwards. Goods as different as newspapers, dice and hats were liable to this duty, which was a fixed amount. The later Stamp Act of 1765 can be seen as one of the catalysts for the American War of Independence – the rate may have only been about 2% (ridiculously low by modern rates of taxation) but the rallying cry was “no taxation without representation”.
From 1849 stamp duty was largely administered by the Inland Revenue but it gradually fell into disuse as other forms of direct and indirect taxation were introduced. Apart from being used nowadays for some financial services such as the transfer of shares and securities, stamp duty had really disappeared by 2003 with the sole exception of an off-shoot of the original tax: Stamp Duty Land Transfer which was part of the Finance Act of 2003.
Stamp Duty Land Tax (SDLT) and its rates
SDLT is a tax which is paid when you purchase property or land over a certain price in England, Wales or Northern Ireland (although in Scotland it’s been replaced by the Land & Buildings Transfer Tax). There are different rates for residential and non-residential property. For residential property, you pay no tax if it’s worth under £125,000 and then there’s a sliding scale of 2% for prices of £125,001 to £250,000 reaching a maximum of 12% for property valued at over £1.5 million. You usually have to pay a supplementary 3% on top of the normal rates if buying the property means that you own more than one domestic residence.
For non-residential property or mixed use land, the threshold for exemption from SDLT is £150,000. After this, the duty is 2% for property or land worth up to £250,000 and 5% for anything worth over this amount. To find out how much you’ll pay, you can use the HMRC Stamp Duty Land Tax Calculator on the government website.
In certain circumstances, you’re exempt from paying any SDLT whatever on the value of the property. For example, if it was left to you in a will or if it was transferred to you as part of a divorce settlement or at the dissolution of a civil partnership.
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Paying the Stamp Duty Land Tax
Even if you’re exempt from paying the SDLT, you should still send a return to HMRC for the transaction since they’ll provide you with a certificate, without which you can’t register the change in land ownership.
This tax must be paid within 30 days of completion of the sale otherwise you’ll be charged both penalties and interest on the amount due. If you’ve used a solicitor, agent or conveyancer for the purchase of the property, they will often file the return on your behalf and will add the sum to their fees. If you haven’t used the services of a professional, you can file a return on your own.
The SDLT is paid in one single payment with the sole exception of people who purchase under a shared ownership scheme run by an approved body such as a Housing Association. In this case, you can choose to pay a single amount according to the market value of the property or pay the SDLT in stages.
Begun as a tax on certain goods in the late 17th century, stamp duty is now only used for certain financial transactions.
The Stamp Duty Land Tax (STLT) began in 2003 and is a tax paid on the purchase of land or property.
The amount of SDLT is calculated as a percentage of the value of the land or property and whether it’s residential or non-residential.
HMRC must be notified within 30 days of completion of the sale and any tax must be paid within this period or interest is charged.
The history of Capital Gains Tax
Capital Gains Tax was originally called Capital Transfer Tax and was introduced in 1965 as a direct result of the dramatic rise in property speculators in the Post-Second World War period. It was replaced in 1986 by Capital Gains Tax. It’s considered to be an important anti-tax avoidance measure to prevent taxpayers from converting income into capital gains and thereby reducing their tax liability.
Capital Gains Tax prevents taxpayers from converting income into capital gains and thereby reducing their tax liability.
Questions on UK property taxation
In the UK, property taxes are in effect. When a property is bought, the buyer is liable to pay Stamp Duty Land Tax (SDLT), if the property value is over a certain threshold. SDLT applies to residential properties with a value of more than £125,000, or to non-residential properties and land valued at more than £150,000.
If you selling your main home in the UK, then you are not normally liable to pay any tax. However, if you are selling a buy to let property or second, then you will be taxed on your profit in the form of capital gains tax (GCT).
For both resident and non-resident foreigners in the UK, there is the possibility to buy property in Britain. Some banks may even offer mortgages to expats, although each bank sets their own rules for these situations. Mortgages offered to expats are normally less favourable, such as imposing higher interest rates.
Capital Gains Tax (CGT) – Who pays?
Capital Gains Tax is the tax paid by an individual on the profit made from selling an asset – this could be personal possessions such as jewellery or paintings (with a profit of more than £6,000); property; land or a business/its assets. Companies aren’t liable for this tax since they’d be taxed for the sale of assets under Corporation Tax. For tax purposes, your ‘gain’ is calculated as the difference between the amount you paid for it and the amount you sold it for after deducting the costs of any improvements or professional fees. If the asset was jointly owned with someone else, you work out the gain on your own share.
Exemptions to Capital Gains Tax
There are a number of exemptions to Capital Gains Tax. It isn’t paid on private cars, pension funds, saving schemes such as ISAs, government gilts, Premium Bonds nor any gains from betting, the lottery or the pools. Tax relief is available if the asset is a business or property owned by a dependent relative.
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You aren’t usually liable for CGT for the sale of your own home as long as you meet the criteria for Private Residence Relief. These criteria stipulate that it must have been a home you lived in; it hasn’t been let or used as business premises; the property is under 5,000 square metres and you didn’t buy it with the sole intention of making a profit. If you don’t meet all these conditions, you may have to pay some Capital Gains Tax.
Ownership transfers and/or gifts to spouses or civil partners are exempt from CGT and so are gifts to charities. Possessions that you receive as a legacy in a will come under the rules for Inheritance Tax although you may be liable for Capital Gains Tax when you decide to dispose of them.
How much revenue is raised by Stamp Duty Land Tax in the UK?
According to forecasts made by the Institute for Fiscal Studies, SDLT brought in £12.9 billion in 2016-17, which makes up 1.8% of all government receipts.
How many individuals pay Capital Gains Tax?
According to HMRC figures for 2013-14, 211,000 individuals and trusts paid Capital Gains Tax.
How much money does CGT raise for the Treasury?
Capital Gains Tax is estimated to have raised £7 billion in 2016-17 or 0.7% of all government revenue (IFS figures).
How many housing purchases are there in the UK?
According to HMRC (based on SDLT figures), 338,540 properties of over £40,000 were bought in the period January-March 2016. However, this was before the rise of stamp duty in April 2016 so the numbers might be inflated for that reason.
Capital Gains Tax rates
After taking into account the exemptions and possible tax relief, the amount you pay for Capital Gains Tax depends on your income tax band and the source of your gain – whether it was from the sale of residential property or from other chargeable assets. To calculate your tax liability for CGT, you should subtract your tax-free allowance (which is £11,300 for 2017-18) from your total capital gains to find out your taxable capital gains.
For basic income taxpayers, you’re charged 18% on profits from residential property and 10% on other assets as long as you stay within your basic tax threshold. For amounts above this threshold, you’ll be charged the higher rates, which are the same as higher or additional taxpayers. These rates are 28% on gains from residential property and 20% on the profits made from the sale of other assets.
Reporting and paying Capital Gains Tax
There are 2 ways of reporting capital gains liability to HMRC. It can be done straight away using the ‘Report CGT Online Service’, which is a Real Time Transaction tax return. Before doing so, you’ll need to set up a Government Gateway Account on the sign-in page. Alternatively, if you always complete a self-assessment tax return, then any capital gains can be included as part of your annual tax return.
After taking into account the exemptions and possible tax relief, the amount you pay for Capital Gains Tax depends on your income tax band and the source of your gain.
However you decide to report the gain to HMRC, you must report any capital gains by 31st January in the tax year immediately following the year you had the gain. You will be sent a letter by the tax office telling you how much you’ll have to pay, the deadline and how you can pay. From 2019, there are plans to make it compulsory for CGT on property sales to be paid within 30 days (in the same time-frame that Stamp Duty is paid).
Capital Gains Tax was first introduced in 1965 and is a tax imposed on the individual for profits arising from the sale of property or other chargeable assets.
There are a number of circumstances when you’re exempt from paying CGT as well as situations when you’re entitled to tax relief.
The rates you pay for capital gains depend on your income tax rate and whether it arises from the sale of residential property or other assets.
Liability for CGT must be reported to HMRC by 31st January in the year following the sale and they’ll inform you when/how much you must pay.
Reducing your tax liability for capital gains
There are a number of common sense ways to reduce the amounts of tax you have to pay for capital gains.
One way is to be aware of how the tax year runs to avoid selling too many assets in the same tax year. The other thing to remember is that all individuals have their own tax-free personal allowance for CGT so assets can be put in joint names (with your partner) to spread CGT liability. Another way to minimise your tax bill is to be aware of all the exemptions. Did you know, for example, that ‘wasting assets’, which are assets with a useful life of 50 years or less (such as a boat) can be exempt from Capital Gains Tax?
Consulting an independent financial adviser is a good idea before you make any investments since they’ll be able to advise you on the best ways to invest your money so CGT doesn’t have to be paid.
The history of Inheritance Taxes
Legacy, Succession & Estate Duties, established in 1796, were the precursor of Inheritance Tax and by 1857, the state charged the beneficiaries of any estate worth over £1,500. Called ‘death duties’ in 1894, these taxes were responsible for the break-up of many large estates of families (often titled) that may have been rich in land but were poor in ready cash to pay the money they owed the government.
Although people still call the tax ‘death duties’, it has changed its name and undergone several charges in scope and rates since then. In 1975 it was renamed Capital Transfer Tax but has been known as Inheritance Tax since the Finance Act of 1986.
What is Inheritance Tax – Who pays and who’s exempt?
At a property-owner’s death, the value of their estate is calculated (after deducting any debts) and if it’s worth more than £325,000, then the estate is liable to pay Inheritance Tax. Their estate doesn’t only include their residential property but all assets such as businesses, investments, cash in the bank and insurance policies.
The main exemption to Inheritance Tax is that spouses and civil partners are allowed to pass on their estate to the surviving partner tax-free. They can also pass on their unused tax-free allowance, which doubles the surviving partner’s tax-free allowance to £650,000.
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Other exemptions to Inheritance Tax include agricultural land/property although some farm machinery may be liable for this tax. Depending on the type of business owned and how it’s held, some pay reduced rates for Inheritance Tax of 50%.
Gifts (whether in the form of cash or property) are exempt as long as they were given over 7 years before the death of the person liable for Inheritance Tax. Gifts given in the 7 years before are called ‘potentially exempt transfer’ and their taxable rate depends on when they were given with a lower tax rate for older gifts.
Rates for Inheritance Tax and payments
The rate for Inheritance Tax is calculated as 40% of the estate above the £325,000 threshold although this rate is reduced to 36% if at least 10% of the assets are left to charity.
Inheritance Tax is usually paid by the person responsible for administering the estate or the executor if there’s a will. This tax must be paid within 6 months of the death or HMRC will charge interest.
Main Residence (or Home) Allowance from April 2017
From April 2017 changes have been made to the law regarding the inheritance of the main family residence giving an extra tax-free allowance of £100,000. To be eligible, the transfer must be made to a direct descendant such as children, step-children or grandchildren. Changes are planned to increase their tax-free allowance by at least 75% in the future to reflect the growing costs of residential property in the UK.
There are a number of ways to reduce your liability for CGT although you may need to consult an independent financial adviser.
Inheritance Tax has changed name, scope and rates many times since it was introduced in the 18th century.
Inheritance Tax is paid on any assets worth over £325,000 although there are a number of exemptions and reductions in certain circumstances.
The rate for Inheritance Tax is 40% and it should be paid within 6 months of the death.
Estate planning to avoid Inheritance Tax
Estate planning before your death is a very complex subject and to ensure that your descendants reap the benefits of all your hard work (rather than HMRC) requires the help and advice of an expert such as a solicitor or financial adviser. Unfortunately many people feel that it’s morbid to make arrangements for their own deaths.
There are many things you could do such as setting up a Trust Fund or arrange for a life insurance policy (held in trust) to pay for all or some of the Inheritance Tax but you need expert advice.
How much is Inheritance Tax reduced for gifts given less than 7 years before the death?
For gifts given up to 2 years before, there’s no reduction. For 3-4 years it’s 20%; 4-5 years is 40%; 5-6 years is 60% and in the 12 months before the death, the Inheritance Tax is reduced by 80%.
How much does Inheritance Tax raise in revenue?
Inheritance Tax raised £4.8 billion in 2016-17 (IFS estimates), which is 0.7% of all government revenue.
How many people pay Inheritance Tax?
According to HMRC figures for 2015-16, 41,000 estates were liable for Inheritance Tax, which represents 6.6% of all deaths in that period.
What is the value of gifts which can be given without triggering Inheritance Tax?
You’re allowed to give gifts of up to £3,000 to anyone in any given tax year without the gift becoming liable for Inheritance Tax. Wedding gifts of between £1,000-£5,000 can be given too (the value depending on whether they’re family members or friends) as long as they’re given before the wedding and not after.