Tax considerations when purchasing or selling a property
Whether you are purchasing or selling residential or commercial property there are several types of Tax that may need to be paid. Since tax may not be payable until after the sale has taken place, it’s important that you know what the bill is going to be before you commit to the transaction, so you can make sure you have enough money to cover everything.
This article will provide you with a brief outline of the most common taxes that could be due on your property transaction. Please make sure you talk to your solicitor about what taxes will affect you and how much you need to pay. Tax can be a very complicated aspect of purchasing or selling a property, so you need to be careful and ensure everything is paid correctly. There can also be deadlines on when these taxes need to be paid as well as penalties and interest if you do not pay on time, so make sure you don’t end up with a bigger bill than you need to have.
Stamp Duty Land Tax (SDLT) is a mandatory payment when buying a property in England or Northern Ireland over a specified price. In Wales, you will be liable to pay Welsh Land Transaction Tax.
Stamp duty changes quite often, so make sure you have the most up to date information for your property purchase. Currently, the threshold for SDLT is £125,000 when buying a residential property and £150,000 when buying non-residential land and properties. Therefore, if your transaction is under that amount, there may be no stamp duty to pay.
If the purchase price of the property that you are purchasing is over £125,000 then you will pay SDLT. However, different rules apply if the property you are purchasing is your first or is an additional property.
Sometimes there are discounts available on the amount of stamp duty you have to pay. This is known as relief. At the moment, if you are a first time buyer, you may get some relief from SDLT.
SDLT is payable when buying a freehold property, buying a new or existing leasehold property, buying a shared ownership property (government shared ownership scheme) and transferring land or property for monetary consideration such as taking on a mortgage or purchasing a share in a house. If you are buying a lease, but there is no premium to be paid for the lease, and you are simply going to pay rent, there may still be SDLT, depending on how much rent you are paying and over what period.
The amount of SDLT you pay will depend on a number of issues such as whether the property is residential or commercial, how much you are paying, whether you are a first-time buyer and whether the property is non-residential or mixed-use.
SDLT has to be paid within 14 days of the date on which your property purchase completes. If using a solicitor, agent or conveyancer, they will usually file your SDLT return and pay the tax due on the day of completion by adding the tax amount to the fees they charge you. In doing so, any relief you are eligible for will also be claimed on your behalf.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax which you may need to pay when you sell your property. It is a tax on the profit when you sell something that has increased in value. You do not pay the tax on the whole amount, only on the gain that has been made. If there is no gain on the value of the property, then you will not pay.
CGT is calculated on the gain you have made and is paid at the time of sale:
- any possessions with a value in excess of £6,000 with the exception of an individual’s car
- any property that is not your main residential property
- an individual’s main residence if it is particularly large or has been rented out or used for business purposes during the period of ownership
- shares not part of an ISA or PEP
- any business assets
As it is more common than not for property to increase in value during the time you own it, it’s likely that CGT would be applicable and need to be paid. However, as this only applies to investment or business property, it is unlikely to affect many transactions.
CGT is typically paid to HMRC by 31st January after the tax year during which the capital gain was made. For example, for gains made during 2018-19, CGT will be payable by 31st January 2020. A gain must be reported as a part of an individuals Self-Assessment Tax Return. HMRC do also provide an option that allows taxpayers to report any gains and pay immediately. You might prefer to do this as you may forget if you leave it until the 31 January.
You can pay the tax due on your capital gain by cheque, faster payments, CHAPS or Bacs.
Most property owners are familiar with council tax, which is payable to the local authority of the area where the property is located. However, if you are a first time buyer (or renter) this may be new to you and you need to take it into account when deciding if you can afford to buy or rent your first place. Council tax is your contribution towards the cost of services within your community. This is something that you need to be aware of buying or selling a property as it is payable on all properties
Each property is categorised into council tax bands between A-H. Which band a property falls into depends on its size, location and some other considerations. When purchasing a property, you must check exactly what band you are.
If the house you are leaving will be empty you will still have to pay council tax on it until it is transferred into someone else’s name. So, for example, if you are renting a property but moving out before the end of the tenancy agreement, you will still be responsible for the council tax until the tenancy expires, but you may be entitled to a reduction in rent.
Tax on rental income
You might decide you want to rent your property to someone. If so, any rental income you receive is taxable in the same way as your salary is subject to tax. The tax you will need to pay is income tax, whatever you earn will count as income. If you become a full-time landlord you will need to declare to the HMRC that you are starting a business, which will result in you being taxed differently.
As a general tip, a solicitor or conveyancer will know exactly what tax you need to pay and normally will deal with all the paperwork and any legal documents that need completing. They will also be fully aware of when these taxes need to be paid. If you are unsure, take advice!
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.