If you’re an expat looking to calculate property taxes in UK regions, this guide will help you through the process step by step. These simple tips will help take the mystery out of understanding how much your property tax will be. Calculating this amount can be confusing and complicated, but it doesn’t have to be.
What is Residential Property Tax?
To calculate property tax in the UK, you’ll first need to understand what it is. UK residential property tax, also known as council tax, is a percentage of the market value that UK residents pay yearly to their local authorities. The tax helps fund local governments and services throughout various UK regions.
The UK property tax rate is calculated as a percentage of the market value. You can determine this value by using UK specific property calculators. The UK market value of property purchases is determined by considering several factors, such as size, location and amenities. The rates are based on UK tax band values.
What is Stamp Duty Land Tax (SDLT)?
Stamp duty land tax (SDLT) is UK residential tax that residents must pay when purchasing UK residential properties. The UK stamp duty rate is calculated as a percentage of the UK purchase price of the home. SDLT rates are different for purchases by individuals and corporate entities.
The coronavirus pandemic caused SDLT rates to increase drastically. In addition, UK residents pay higher taxes on a property because the disease has disrupted the UK economy, which led to less UK tax revenue for government operations.
What are the Rates and Thresholds of Stamp Duty in the UK?
Stamp duty UK rates vary depending on the UK purchase price of the property. This amount is paid in addition to the tax. If you’re buying your first property in the UK, here’s the amount of stamp duty you are required to pay:
- 0% for prices up to £125,000
- 2% for prices higher than £125,000 and up to £250,000
- 5% for prices higher than £250,000 and up to £925,000
- 10% for prices higher than £925,000 and up to £1,500,000
- 12% for prices higher than £1,500,000
How to Avoid Paying Stamp Duty
As UK property tax has increased amid the pandemic, residents have been looking for ways to avoid paying stamp duty. The best way to avoid UK stamp duty is to buy residential properties with a purchase price under the threshold amount. In addition, UK residents can also benefit from having a principal place of residency because they will not have to pay tax on their homes.
What is Capital Gains Tax (CGT)?
Capital gains tax is a type of UK tax that is payable when residents sell their residential property. Although there may be special exemptions for specific properties, the rates are typically lower than the UK income tax rate. Whether or not you have to pay UK capital gains tax on a residential property sale depends on the rationale behind the sale and the date of purchase.
The capital gains tax in the UK is charged at a rate of 28%, where there are total taxable gains and income that exceed your basic rates band. Below this limit, it’s 18%. If you’re being taxed as an individual or trustee for someone who has died, then it increases to 28%.
Capital Gains Tax in the UK for Expats
Tax authorities in the UK have changed their policy and now require British expats to pay capital gains tax when they sell properties for gain. The new law went into effect on sales made after April 6, 2015. Expats who own UK properties and wish to sell them past that date are required to pay CGT.
What is Annual Tax on Enveloped Dwellings (ATED)?
Annual tax on enveloped dwellings (ATED) is a type of tax on property introduced in 2013. It affects UK expats or residents who own properties that are classified as ‘Enveloped Dwellings’.
An enveloped dwelling is defined as any UK residential property that an individual purchased or was given. But this is only for those who are not in one of the many exempted categories.
Here are the chargeable amounts for ATED based on a property’s value:
- Annual charge of £3,700 for property value of more than £500,000 up to £1,000,000
- Annual charge of £7,500 for property value of more than £1,000,000 up to £2,000,000
- Annual charge of £25,200 for property value of more than £2,000,000 up to £5,000,000
- Annual charge of £58,850 for property value of more than £5,000,000 up to £10,000,000
- Annual charge of £118,050 for property value of more than £10,000,000 up to £20,000,000
- Annual charge of £236,250 for property value of more than £20,000,000
What is Inheritance Tax (IHT)?
In UK regions, inheritance tax is due when someone dies and leaves you their property. However, UK property tax rates differ widely across regions and the UK overall. This difference means that if you own a home in one UK region and move to another with no intention of selling it (or giving or bequeathing it away), your new home may not incur any tax. In contrast, your old UK home might still be subject to IHT years later, depending on its value at the time of death.
The inheritance tax threshold in the UK is relatively high, meaning that if an estate is worth more than £325,000 when they die, their beneficiaries may have to pay up to 40% on everything above this amount as inheritance tax.
How to be Tax Efficient With Your Property Assets
It’s a common trend for UK expats to be purchasing residential properties back home. If you have a property in the UK, this will usually put you into the country’s tax brackets – regardless of where in the world you’re living. Understanding how much tax you’ll need to pay for your UK residential property is essential because it can affect your monthly cash flow and drastically impact your broader finances.
Many UK expats plan their day-to-day expenses using a percentage of their net income from UK sources. Unfortunately, this means that as your UK tax rate increases, so do your overall financial management costs. Suppose you want to circumvent these high financial barriers of owning UK properties as an expat. Your first step should always be understanding the exact property tax between the UK and where you live. You can then plan accordingly and take the necessary deductions on how to work towards tax relief.
Chartered Financial Planner
I am an active member of the CII and the Personal Finance Society (PFS) and believe strongly in their code of ethics and only doing the right thing for my clients.