What Taxes Are Involved When Buying And Selling Property?
Welcome to the (sometimes) confusing world of property and land tax. In this blog we’ll take a look at some of the taxes involved when buying and selling a property in England…
Property taxation is a highly specialised area and this blog is not a complete guide, rather a breakdown of some of the taxes that you may be unaware of and how they might affect you.
I am not a property tax expert and I would always recommend speaking to a property tax specialist and consulting the many useful guides at GOV.UK for a more in depth look at your tax obligations.
With this in mind, there are three common types of taxation that you might encounter when buying and selling a property. The first and generally most well-known of these is Stamp Duty Land Tax (Previously known as stamp duty)
SDLT is usually one of the first things reported on by the media in relation to property and the budget.
It is basically an amount of tax you will have to pay if you buy a property worth £125,000 and over.
The percentage you have to pay increases depending on which bracket the property you are purchasing falls into:
Property or lease premium or transfer value SDLT rate
Up to £125,000 Zero
The next £125,000 (the portion from £125,001 to £250,000) 2%
The next £675,000 (the portion from £250,001 to £925,000) 5%
The next £575,000 (the portion from £925,001 to £1.5 million) 10%
The remaining amount (the portion above £1.5 million) 12%
(Figures from gov.uk 2019)
So for example, if you buy a property for £275,000, the SDLT you owe is calculated as follows:
0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the final £25,000 = £1,250
Total SDLT = £3,750 (The amount of tax you have to pay. Be aware that you still have to send an SDLT return for transactions under £125,000 unless they are exempt. For a list of exemptions check here)
If you are buying a new residential leasehold property you pay SDLT on the purchase price of the lease using the rates above. If the total rent over the life of the lease is more than £125,000, you also pay SDLT of 1% on the portion over £125,000 – unless you buy an existing lease. For more information on leasehold property, click here.
There are some exceptions to these rates, if you are purchasing your first home you can claim a discount (relief) so you do not pay any tax up to £300,000 and 5% on the portion from £300,001 to £500,000.
You are eligible for this relief if:
- You, and anyone else you are buying with are first time buyers
- You complete your purchase on or after 22 November 2017
If the purchase price is over £500,000, your first time buyer tax privileges are not applicable and you’ll fall under the same SDLT thresholds as everyone else.
So, we’ve covered SDLT for purchasing your new home and if you are purchasing a first home, but what if you are purchasing a second home?
Well, the SDLT rules are slightly different.
You’ll still have to pay the normal SDLT rates as above, but if buying a new residential property means you will own more than one, you will usually have to pay an additional 3% on, top of the “normal” SDLT.
This applies even if you intend to only own two properties for a short period, so if there is a delay in selling your main residence and it has not been sold on the day you complete your new purchase you will have to pay the higher rates because technically you own two properties.
However, you may be able to get a refund on the additional SDLT if you sell your main home within 36 months.
It all sounds very complicated!
But don’t worry, you can calculate the SDLT you will need to pay using this handy SDLT calculator and your solicitor or conveyancer should be able to explain exactly how much you will need to pay and make arrangements to fill in the necessary return and make payment on your behalf.
The second type of tax you may encounter when buying and selling property is Capital Gains Tax.
Capital gains tax is only applicable if you own a second home.
The idea is that you have bought assets with the intention of making a profit and as such you are expected to pay tax on any gains you make on the value of the property when you come to sell it.
You have to pay capital gains tax when you sell (or dispose of) a property that is not your main home or your main home if you have rented it, used it for business or it’s very large. You can find more in depth information here.
The actual amount of capital gains tax you pay depends on your overall income.
At the end of the tax year, any gains you have made through disposing of property or other chargeable assets are added to your taxable income.
You only pay capital gains tax on your overall gains above your tax free allowance which is £11,700.
If you pay higher rate income tax the capital gains rates are as follows:
- 28% on gains from residential property
- 20% on gains from other chargeable assets.
If you are a basic rate tax payer, the rates are slightly different:
- Work out your total taxable income (minus any Personal Allowances etc), and then your total taxable gains (minus your tax free allowance).
- Add the two figures together.
- If this amount is within the basic Income tax band you’ll pay 10% on your gains (or 18% on gains from residential property). You’ll pay 20% (or 28% on gains from residential property) on any amount above basic tax rate.
This is just a brief overview of capital gains tax and I would advise that you seek sound financial advice from a tax specialist to make sure you correctly calculate any tax you may need to pay.
The third type of tax you may come across is Inheritance Tax.
This tax is payable on your ‘estate’ (which includes everything you own) when you die.
It includes property, investments, possessions etc.
Your estate must be worth more than the tax-free threshold of £325,000 before you pay any inheritance tax and the rate charged is 40% on anything over this amount.
So, for example:
-Your estate is worth £500,000 and your tax-free threshold is £325,000. The inheritance tax charged will be 40% of the £175,000 (£500,000 minus £325,000).
There are reliefs and exemptions to inheritance tax, such as leaving everything above the threshold to your spouse, civil partner, charity or a community amateur sports club.
However, even if your estate is under the threshold, you’ll still need to report it HMRC.
For more information on exemptions and capital gains tax click here.
So there you have it, a brief explanation of some of the types of tax associated with buying and selling property.
As I said above, this is a VERY brief over view and property and land tax can be a complicated business, so make sure you seek sound advice from a tax specialist.
It’s also a great example of why you should use a reliable and trusted solicitor or conveyancer to handle any property transactions, they will be familiar with the necessary rules, regulations and paper work required to make sure your tax obligations are fulfilled.
For more useful advice about selling or buying a property, make sure you subscribe to our brilliant newsletter, contact your local Hannells Branch or visit our blog at www.hannells.co.uk/news.
Hannells – A Moving Experience…