+44 7393 450837

advice@adamfayed.com

Follow on

London property tax guide 2021

This article will discuss London property taxes in 2020-2021. Whilst this article shouldn’t be considered as formal tax advice, and could change in the future, we hope the guide can help you.

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me or use the WhatsApp function below.

Often times, especially for expats, more portable, low-cost and convenient assets exist than direct property, which is becoming increasing tax-disadvantageous, as this guide will highlight.

Introduction

London is the leading city in the world. It is the world’s largest financial center near New York and is home to over 100 of Europe’s 500 largest companies. It has the most visitors from abroad from all cities in the world.

London is the capital of England, located in the southeast of the country. Although England is an independent country, it is also part of the United Kingdom along with Northern Ireland, Scotland and Wales.

It is the largest city in the UK in terms of density and population. It is approximately 600 square miles (1,500 square kilometers). As of 2015, the population of London is approximately 8.6 million and all people, plus the increasing number of expats, who have income or own a property in London, have to pay taxes. 

In this article, we will be mainly focused on the property tax and its different types. But first let’s discuss the British tax system in total.

British tax system

a1 45
London property tax guide 2021 2

While many sources describe the UK tax system as complex – arguably one of the longest sets of tax codes in the world – in terms of macroeconomics, the UK tax system is relatively simple for most people. If you live and work in the UK or retire in the UK, you are generally required to pay taxes in the UK, but the amount of tax depends on your tax resident status and individual circumstances.

The UK’s exit from the European Union will entail a number of different changes to the tax code as the country seeks to maximize economic revenues. Therefore, the information contained in this manual may change accordingly.

HM Revenue and Customs (HMRC) is responsible for the administration and collection of taxes in the UK. UK tax revenue in 2018/19 was approximately £ 627.9 billion, up £ 22.1 billion from the previous year.

Major UK taxes include income tax, property tax, capital gains, UK inheritance tax and value added tax (VAT). Many of these are progressive taxes, which means people with higher incomes pay a higher rate.

The British tax system applies throughout the UK – England, Scotland (although there are some particular differences due to Scotland’s unique legal system), Wales, Northern Ireland and many of the smaller islands off the British coast. It also includes oil-drilling platforms in British territorial waters, although this does not specifically include the Channel Islands and the Isle of Man.

One interesting aspect of UK tax is that it treats spouses as individuals and taxes them as individuals, with the exception of a small allowance for income tax purposes.

Before you can pay taxes in the UK, you need a National Insurance Number. In addition, you may also need to apply for a Tier 2 visa.

Until the end of 2020, the UK remains part of the EU under the transitional status quo, so at present, citizens of the European Economic Area do not need any of these documents. Although the UK officially left the EU on January 31, 2020, it is unlikely that the rules will change for the 2020-21 fiscal year.

Who should pay tax in the UK?

In general, many of the various taxes that a UK resident individual will be liable for, other than VAT, will be related to income tax in one way or another. The basic formula for this is to add your personal income and benefits, subtract your personal benefit, and then pay the appropriate rate on the difference.

In the 2020/21 tax year, all individuals are allowed to receive a personal benefit of £ 12,500, making income below this tax exempt. UK income tax rates vary according to your income. These steps or ranges are also used to determine other tax rates, such as capital gains.

An estimated 31 million people pay taxes in the UK.

UK tax rates are the same for everyone, regardless of their resident status. However, resident status determines which sources of income must be included in your return. An individual who is resident in the UK for tax purposes will be taxed on his or her worldwide income with surcharges to prevent double taxation from certain countries. On the other hand, non-UK residents only pay for UK income.

UK does not recognize joint registration; each person must submit their own report.

Concerning the property taxes, in recent years, the UK government has paid particular attention to the taxation of residential properties. The changes have complicated the tax system, while the vibrant UK property market has attracted an increasing number of foreign buyers. 

If you are seriously considering buying a property in London, it is recommended that you consider that you have to pay taxes. The information in this article can be a general guide to taxes to consider, but cannot replace exhaustive advice. Anyways, for the beginning let’s discuss how you can buy property in the UK.

Buying property in the UK 

Buying a property in the UK can be divided into 3 stages: search and offer, transfer of ownership and finishing touches.

Step1. Find the right property and make an offer, usually through your real estate agent. An offer does not oblige you to make a purchase by law, except in Scotland where offers are binding. At this stage the seller is not bound by legal obligations – it is very common to withdraw from a buy or sell agreement before the final contract is signed, except in Scotland.

Step2. After your proposal is accepted, you can organize a survey. It is highly recommended to conduct a survey for early detection of potential problems. There are usually two types of polls:

  • a building survey, which will cost you approximately £ 500 (€ 369) to £ 1,000 (€ 739)
  • home buyer report, which will be cheaper from around £ 300 (€ 222) to £ 500 (€ 369)

Step3. The next step is the legal transfer of property. To do this, you will need an attorney or licensed conveyor. Again, there is no set commission scale, so discuss and clarify if VAT and / or payments are included in the preliminary proposal. The transfer is done by exchanging notes between the seller’s attorney and your attorney. The seller’s lawyer will draw up a “draft contract” containing the price, information about the seller’s ownership, etc.

Your lawyer will check this and negotiate with the seller’s lawyer. Searches, inquiries and surveys conducted on your behalf will include seeking local authorities to ensure the property does not interfere with any project; search in the land registry to check the reliability of the title. Other inquiries will check things like mining rights, floods, pollution, etc. This part of the ownership transfer process will take at least two weeks, but it usually takes two or three months.

Step4. When you and your lawyer are satisfied, you sign the final contracts. This binds both parties legally – the sale must be made. At this point, you make a non-refundable deposit of 10%.

Step5. Then an agreement on the transfer of ownership will be prepared and signed by both parties. A completion date will also be agreed. In the period between the signing of the contract and the date of completion, the corresponding agreements are agreed with the department of the land registry: stamp duty and other fees associated with registration are paid. The payments have been completed and the documents have been handed over to you. The process is over, now you are the lucky owner.

Selling property in the UK

Before real estate in England and Wales can be put up for sale on the open market with vacant possession, a House Information Package (HIP) must now be provided (Housing Act 2004). The idea is to reduce the (large) number of sales failures in England and Wales (28% of all “agreed” sales failed) and is based on Danish practice.

The package must be no older than three months at the time the property is first put on the market and must contain:

  • Energy Performance Certificate
  • Sales statement
  • Copy of title documents for real estate
  • Local authorities and drainage search
  • Index

If the property is rented or shared, the package should also include the following:

  • Copy of the lease
  • Construction insurance policy
  • Landlord or management contact details and any legal information
  • Rules in force
  • Latest receipts and invoices for service payments

The original idea was to include a Home Condition Report to keep costs down for buyers, but this has not been implemented. Failure to provide a home information package or an incomplete package will result in a £ 200 (€ 148) fine.

Home information packages should cost between £ 300 (€ 222) and £ 600 (€ 444) for most properties in England and Wales. Some real estate agents offer HIPs for free, however the Society of Lawyers recommends using independent HIP providers to avoid being tied down or initiating penalties.

Stamp duty land tax (SDLT)

SDLT is paid when buying property in the UK. The rate applied will depend on the value and nature of the property, with different rates applied to different “ranges” of value (see table for details).

There is an SDLT “surcharge” if the individual buyer (or spouse) of UK residential property already owns residential property (anywhere in the world) and will continue to do so after purchase. The surcharge provides for an additional 3% SDLT resulting in applicable rates ranging from 3% to 15%. There are benefits and circumstances under which an additional 3% can be refunded.

There is a penalty rate of 15% (of the total purchase price) for purchases made by “non-individuals” such as companies. This applies broadly to ATED eligible buyers (see below). There are exceptions to this rate, for example for eligible rental companies. The government is also consulting on additional SDLT fees from overseas buyers.

Inheritance Tax (IHT)

For those who do not reside in the UK, the IHT is paid on death and in the case of gifts in a UK asset trust. Offshore-owned residential property in the UK is considered a “UK place” for tax purposes since April 2017 and is subject to IHT in the event of the death of a shareholder.

The IHT fee is 40% over the zero rate range of £ 325,000 (0% charged), although various benefits are available. Many clients are considering mitigating the impact of IHT by handing over property to their (minor) children. While this may sound attractive, it can have serious tax disadvantages in some cases. This is an area where early advice comes in handy, as a gift once made is difficult to spin.

Non-Resident Capital Gains Tax (NRCGT)

From April 2015, NRCGT is payable from profits generated by non-residents from the sale of residential property in the UK. The NRCGT rate is 28% (although in some cases the 18% rate applies). 

The NRCGT is payable on the increase in the value of the property, that is, the difference between the purchase price and the value at the date of sale (less any deductions or benefits). NRCGT returns must be filed and taxes paid within 30 days of the sale.

The NRCGT arises from the “divestiture” of residential property (by individuals; companies are slightly different and outside the scope of this note), such as gifts to family members. Gifts can have widespread tax implications in the UK (only one tax should be accounted for with the NRCGT) and it is important that tax advice is obtained before any gift is made.

While this is not the main focus of this post, it is worth mentioning that the NRCGT has been extended to all UK real estate, such as commercial real estate owned by non-UK residents from 1 April 2019.

Annual Tax on Enveloped Dwellings (ATED)

ATED is an annual tax on properties over £ 500,000 owned by “non-individuals” such as companies. ATED fees range from £ 3,650 to £ 232,350 per year depending on the value of the property; the collection increases annually in line with inflation.

The ATED report must be submitted every year. Benefits exist in certain situations, but they must be filed on an ATED return annually.

Income tax

If you buy a residential property in the UK for rent to tenants, income tax is payable on the rental income. Rates range from 0% to 45%, depending on the amount of income. After the end of the UK tax year (5 April), non-resident landlords must file a UK tax return in order to declare rental income and pay income tax (by 31 January).

Base rates and stamp duty thresholds

If you do not own any other property in the UK or overseas, the stamp duty you pay to HM Revenue and Customs is:

  • 0% up to £ 125,000
  • 2% from £ 125,001 to £ 250,000
  • 5% from £ 250,001 to £ 925,000
  • 10% off 925,001 GBP 1,500,000 GBP
  • 12% on anything over £ 1,500,001

For example if you bought a property in the UK for £ 245,000, you will be required to pay 0% tax on the value of the property up to £ 125,000 and 2% tax on the value from £ 125,001 to £ 245,000. In this example, your overall responsibility for stamp duty is £ 2,400. This is an effective tax rate of 1%.

Buying for Rent / Second Home with Higher Rates and Stamp Duty Thresholds

In 2015, it was announced that as of April 2016, anyone buying a second UK property, including a purchase to rent, will pay an additional 3% over the applicable standard rate range.

Rates and thresholds:

  • 0% on properties up to £ 40,000
  • 3% from £ 0 to £ 125,000 (if the value of the property does not exceed £ 40,000)
  • 5% from £ 125,001 to £ 250,000
  • 8% from £ 250,001 to £ 925,000
  • 13% off 925,001 GBP 1,500,000 GBP
  • 15% on anything over £ 1,500,001

If you bought a second UK property for £ 245,000, you would pay £ 9,750 stamp duty. This is an effective tax rate of 4%.

Capital Gains Tax (CGT)

Capital gains tax is a tax on income earned on the sale or disposal of an asset, such as property.

Simply put, the total profit or profit is calculated by subtracting the selling price from the original purchase price.

If you are selling real estate, the selling value will usually be the selling price.

Sometimes the market value of the property is used instead, at which one would reasonably expect a sale on the open market.

This can apply if you give away the property, sell it at a discounted price, or transfer it to a related person, such as a family member.

Sometimes market value is also used in calculating the original value of a property.

This can happen if you inherited the property or purchased it before March 31, 1982.

Before calculating the CGT, it is sometimes possible to deduct the cost of improvements made to the property during ownership.

These costs may include advice received, general improvements such as building extensions or garages (excluding finishes and maintenance), and some taxes.

The total profit is then calculated and you, as a supplier, need to apply any tax credits and / or credits before calculating your capital gains tax liability using the appropriate rate.

CGT is levied at a rate of 28% if total taxable income and income exceed the range of the base income tax rate.

Below this limit, the CGT rate is 18%.

For proxies and personal representatives of deceased persons, the rate is 28%.

New CGT rules for British expats and non-UK resident property owners

Until 6 April 2015, you were not subject to UK tax on profits from the sale of UK property if you were not a UK resident for five consecutive tax years.

From that date, if you are a British expat owning real estate in the UK, you will have to pay CGT if you sell your property for a profit.

The new rules apply to:

  • Non-UK resident individuals (expats)
  • Non-resident partners in UK resident and non-resident partnerships, companies and trusts

Inheritance tax (IHT) rates and charges

Since you are an expatriate resident in the UK, your property worldwide is potentially subject to IHT.

Your property includes your property, savings and any other assets that you transfer after you have paid outstanding debts and funeral expenses.

The tax rate is currently 40% for anything above the £ 325,000 zero rate, unless you donate 10% or more of your property to charity and then it will be reduced to 36%.

If your property is wholly inherited by your spouse or your civil partner, they do not need to pay inheritance tax.

Your zero-rate range can also be passed on to your surviving spouse or common-law partner and they can add it to their own, meaning they could potentially leave £ 650,000 worth of property without IHT upon death.

From 2017, a new IHT benefit will be introduced called the transferable basic residency benefit.

This benefit is based on the value of your primary residence. In 2020 and 2021 it will be £ 175,000.

This allowance, combined with the pre-existing zero rate range, means that a qualifying individual will be able to keep £ 500,000 free, and a couple up to £ 1 million, while their property will not be subject to inheritance tax.

The transferable basic subsistence allowance comes into effect when, after death, the place of residence is transferred to a direct descendant, that is, a child, including a foster child, foster child or foster child, and their direct descendants.

The introduction of the tutorial looks like this:

  • £ 100,000 in 2017-2018
  • £ 125,000 in 2018-2019
  • £ 150,000 in 2019-2020
  • £ 175,000 in 2020-2021

Here is all the information about property taxes in the UK. Hopefully, this article can help many of you, to become acquainted with UK taxation system and be a short guide. 

Further Reading

The article below discusses the following issues:

  1. Is it possible to be financially free without being a millionaire? If so, what are the options?
  2. Why do people take financial risks? Or perhaps everybody needs to take financial risks because taking no risk is impossible?
  3. Why is it possible for people earning 50k to seem like they are rich?
  4. Which country has done the best in terms of the economy with coronavirus? South Korea? China? New Zealand? The answer might surprise you.
  5. Most people believe that debt is bad, but is all debt really bad? If so, why do many successful people, businesses and governments use it? Clearly risks remain when taking out debts, so should most people avoid it entirely, or use it strategically?

Click below to read more

Can you be financially free without being a millionaire?

SUBSCRIBE TO ADAM FAYED JOIN COUNTLESS HIGH NET WORTH SUBSCRIBERS

SUBSCRIBE TO ADAM FAYED JOIN COUNTLESS HIGH NET WORTH SUBSCRIBERS

Gain free access to Adam’s two expat books.

Gain free access to Adam’s two expat books.

Get more strategies every week on how to be more productive with your finances.