Know your future tax liabilities when you buy a UK property

Enquire now

Mortgage & Finance News

Jan 11

If you’re living and working abroad, investing in property back in the UK can be a great idea. Buy-to-let (BTL) mortgages, which many expats opt for, can provide you with a great return on your investment – both in terms of annual rental yield and with property price rises. In addition, with the pound suffering against the dollar and the euro in the wake of the Brexit vote you can effectively get more property for your money.

Keeping Up With The Taxman

But before you head to the estate agents and pay a deposit, it’s good to know what your longer term liability might be. After all, if you’re buying a property as an investment, you may well find yourself having to hand over a chunk of your hard-earned profits to the Inland Revenue.

Stamp Duty

You have to pay stamp duty on all properties in the UK above £125,000 on a sliding scale. It is a tiered tax so you only pay the higher rate stamp duty on the slice of the property value over the threshold. For example, stamp duty for a £500,000 property will equate to £15,000 - £125,000 at 0% (£0), the next £125,000 at 2% (£2,500) and the remaining £250,000 at 5% £12,500).

Property Value (£) Stamp Duty % Rate
£0-£125,000 0%
£125,000-£250,000 2%
£250,000-£925,000 5%
£925,000-£1,500,000 10%
£1,500,000+ 12%

Stamp Duty Surcharge

There was a rush in expats buying property before April last year to beat the introduction of the stamp duty surcharge, which adds an extra 3% to the stamp duty you pay if you are purchasing an additional property worth £40,000 or more such as a buy-to-let, a second home or holiday home.

Like basic stamp duty, this additional tax is a tiered tax and the increased rates will only apply to the portion of the value of the property above that threshold, see below:

Property Value (£) Additional Stamp Duty % Rate
£0-£125,000 3%
£125,000-£250,000 5%
£250,000-£925,000 8%
£925,000-£1,500,000 13%
£1,500,000+ 15%

If you buy a property in the UK and you already own property in the UK or anywhere else in the world, you could now be subject to the stamp duty surcharge. On the purchase of a £400,000 property this would mean £22,000.

However, if the £400,000 property you are buying in the UK is the only property you own, whether it is rented out or not, then you won’t be subject to the additional charge and your stamp duty liability would be £12,500.

However, it’s not all bad – if you come to sell the property you can offset the additional stamp duty charges against any capital gains tax due at the the time as a legitimate buying cost.

And even if you do already own more than one property, provided it is your main residence you are selling and effectively replacing with the new property you won’t be liable for the additional stamp duty.

Income Tax

If you rent your property out, then you may have to pay UK income tax on your rental income. The amount you pay will be dependent on net income after costs have been deducted and any personal allowance you may be entitled to.

Currently, basic rate tax payers pay 20%, higher rate tax payers pay 40% and additional rate tax payers pay 45%.

There are certain allowable expenses you can deduct to reduce any potential tax bill and these currently include: maintenance costs, letting agent fees, insurance premiums, council tax and utility bills where applicable.

You can also claim mortgage interest costs currently and offset this against any taxable profits. However, rules which come into effect in April and are being phased in over the next three years, will change this so you will no longer be able to deduct mortgage interest costs from your taxable profits and instead, everyone will be able to claim a basic rate allowance.

Capital Gains Tax

If you decide to sell a property you have bought in the UK, at some point, you could face further taxation.

Capital gains tax (CGT) is potentially payable on any profits you make when selling a UK property and is charged at either 18% or 28% depending on the level of your personal income.

Everyone has a CGT allowance, currently £11,100 for 2016-17, though you’ll need to check this with your accountant, and you will not pay tax on any profits below that threshold. Above that, you will pay at the relevant rate though you can offset some of your tax liability by deducting things like estate agent fees or legal costs from your profit.

Useful Resources:

Stamp duty calculator - calculate your stamp duty costs.