Paying tax on your UK property: purchase and beyond

If you are looking to buy property in Britain, there are few taxes you’ll need to consider before you make the move.

Income tax

Income tax is charged when the value of the property you own appreciates in such a way that you earn some income off that rise. This may be due to renting some part or the entire building to others. Since you have made money from the property, you will be liable to pay tax on your gains. However, if you live on that property and as such do not make money out of it, you will be exempted from this tax.

Capital gains tax

Don’t confuse this tax with income tax. The capital gains tax is only charged when you decide to sell the property later on - hopefully at a profit. However, you may be considered for an exemption if the property was your primary residence, if you have not used any part of the house for business purposes or if the size of the property is less than 5,000 square metres.

Stamp Duty Land Tax

This is a lump-sum tax that everyone buying property or land valued at over a certain amount must pay. The rate of tax you’ll pay varies based on the price of the property, as well as the type.

Let’s say you’re buying a property valued at £300,000. You pay no tax below £125,000, so £0. Between £125,000 and £250,000, you pay 2%, which is £2500. Over £250,000, you pay 5% on the property value, which is £2500. So overall, you’d pay £5000.

If you’re still confused, there are online calculators to help you figure out how much stamp duty you’ll need to pay.

Inheritance tax

Inheritance tax is a toll on the estate of someone who has passed away. The estate includes the deceased’s house, the money in his or her accounts and valuable possessions such as artworks or jewellery. The tax however only applies when the value of the estate is less than £325,000. Also, if you will your belongings to your partner, a local sports team or give it to a charity, then this tax would not be billed on your executor or kinsmen and kinswomen. If you give more than a tenth of your estate to goodwill, then your relatives will be liable for a reduce tax rate.

Property income tax for foreign buyers

Presently, buyers from Europe, the Commonwealth or from countries with treaties with the UK - this includes most countries from the Middle East - may qualify for an allowance of around £11,000 per person, per year. This means the first £11,000 you earn from your property will not be taxed. If your income is over this figure you will need to pay 20% tax on net rental income.

So, while buying a property in Britain is highly desirable and an excellent investment, prospective buyers may want to consider speaking to a lawyer or tax expert to weigh their options before purchasing a property.