Introduction to Taxes for UK Properties
An investment property is real estate property purchased with the intention of earning a return on the investment either through rental income, the future resale of the property, or both. The investment property purchased for renting out purpose is usually called as ‘Buy-To-Let’ (BTL) in the UK. The property may be held by an individual investor, a group of investors, or a corporation.
This article focused on discussing the tax system relating to UK properties in England and Northern Ireland. Wales and Scotland may have their own tax rates.
Taxes to be paid in the UK by landlord in different stages:
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Stamp Duty Land Tax (SDLT) is a tax usually paid on the initial property purchase.
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or a group of investors.Income Tax is a tax to be paid on the net rental income received by an individual investor or a group of investors.
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Corporation Tax is a tax to be paid on the net rental income received by a corporation.
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Dividend Tax is a tax to be paid by the shareholders of a corporation who distributes dividends to its shareholders.
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Council Tax is a tax on residential property charged by the local council where the property is located to pay for local services.
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Capital Gains Tax (CGT) is a tax when selling an investment property that increased in value while the time was owning it.
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Non-UK residents only pay tax on their UK income and do not pay UK tax on their foreign income.
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Stamp Duty Land Tax (SDLT)
From 23 September 2022 onwards, higher rates (3% above the main rates) of SDLT apply on purchases of properties by individual investors. Companies purchasing residential property will be subject to the higher rates, including the first purchase of a residential property.
From 1 April 2021, non-UK residents purchasing a residential property in England and Northern Ireland will be subject to a 2% SDLT surcharge in addition to the higher rate SDLT payable by UK residents.
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Band
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UK residents and Companies
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Non-UK Residents
|
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£0 - £250,000
|
3%
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5%
|
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£250,001 - £925,000
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8%
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10%
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£925,001 - £1.5m
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13%
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15%
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Over £1.5m
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15%
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17%
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|
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Notes: Rates apply to properties purchased in England and Northern Ireland. Wales and Scotland may have their own SDLT rates.
There are currently four exemptions from the high rates:
(1) replacing a main residence
(2) transactions under £40,000
(3) purchase of a non-residential property
(4) bulk purchase of at least 15 residential properties.
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Income Tax
Income Tax is charged on total income from all earnings after deductions and allowances are subtracted from the total gross earnings.
Personal allowance that no tax to pay for is £12,570 in 2022/23 and has been frozen until 2028. There is no personal tax allowance on incomes over £125,000.
2022-23 tax year (6 April 2022 – 5 April 2023):
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Tax band
(England/Wales/Northern Ireland)
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Taxable income
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Income tax rate
|
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Personal allowance
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Up
to £12,570
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0%
|
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Basic rate
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£12,571–50,270
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20%
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Higher rate
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£50,271–150,000
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40%
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Additional rate
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£150,001+
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45%
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Corporation Tax
As per Corporation Act 2009 section 14 any company incorporated in the UK is normally classified as UK resident company and thus subject to UK corporation tax and has to file a Tax return.
From 6 April 2020, non-UK resident companies including those who invest in UK property will need to pay Corporation Tax instead of Income Tax on profits.
The corporation tax main rate will increase from 19% to 25% applying to companies making taxable profit more than £250,000 from 1 April 2023.
Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate. HMRC has set Marginal Relief fraction to provide a gradual tax rate increase.
Corporation tax rates table:
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Financial Year
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2020/21
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2021/22
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2022/23
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2023/24
|
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Main rate
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19%
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19%
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19%
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25%
|
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Small profits rate
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n/a
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n/a
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n/a
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19%
|
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Lower threshold
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n/a
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n/a
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n/a
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£50,000
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|
Upper threshold
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n/a
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n/a
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n/a
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£250,000
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Dividend Tax
Dividends are payable to shareholders of a business. The total amount of dividends payable is a post corporation tax payment, dividends can be called a ‘distribution of profits’ to those individuals that have invested in a company.
There are different tax rules in relation to the receipt of dividends for UK residents and non-UK residents.
For UK residents, when a dividend is paid, it will be subject to UK income tax. The first £2000 will fall under the dividends tax-free allowance (i.e. 0%). After this allowance, depending on other sources of income, the rates of dividends tax can range from 7.5% to 38.1% for the tax year 2021-22.
The tax-free allowance for dividend income is going to reduce from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024 for individuals who receive dividend income.
Dividend tax rates table:
|
Dividend tax band
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2021-22
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2022-23
|
|
Basic rate
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7.5%
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8.75%
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Higher rate
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32.5%
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33.75%
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Additional rate
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38.1%
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39.35%
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Non-UK resident individuals can choose for their UK sourced investment income, including dividends and bank interest, to be disregarded for UK tax purposes. This so-called ‘disregarded income’ can then be received free from UK income tax. However, by choosing this will lead to calculate tax liability without claiming the personal allowance.
For qualifying ‘disregarded income’ will need to remain non-UK resident for at least five complete years, otherwise the dividend will fall back into the scope of UK income tax under the Temporary Non-Residence Rules.
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Council Tax
Council Tax on a buy-to-let property which is usually paid by the tenants unless it is unoccupied. A landlord can claim the council tax as a deductable expense for the period of the property is vacant but available for letting.
The value of a property, and the number of people living in it will impact the amount of council tax payments.
Council tax bands are different in England, Scotland and Wales. Northern Ireland does not use the council tax system, but has a system based on domestic rates.
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Capital Gains Tax
Capital Gains Tax is charged when a landlord has disposed of an investment property. For example, buy-to-let residential and non-residential property, land or inherited property .
The rates of tax on residential property gains are 18% for basic rate taxpayer; or 28% for higher rate taxpayer.
Capital Gains Tax rates for Properties table 2022-23:
|
Tax Band
|
Residential
Properties
|
Properties
other than Residential
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Companies selling
Properties
|
|
Basic rate
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18%
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10%
|
Corporation
Tax correlated to the tax rate charged
|
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Higher rate
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28%
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20%
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Additional rate
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28%
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20%
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If a landlord sold a property in the UK on or after 6 April 2020, any Capital Gains Tax due on the UK residential property must be reported and be paid within:
(1) 30 days of selling the property if the completion date was between 6 April 2020 and 26 October 2021
(2) 60 days of selling the property if the completion date was on or after 27 October 2021
If missing the deadline, penalties and interest may be levied.
HMRC has different rules for Non-UK residents and companies to report the gains or loss for disposal of properties. Details explaining for the rules for Non-UK residents can be found on the point (2) of Tax for Non-UK residents.
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Tax for Non-UK residents
Non-resident landlords are people who have UK rental income and whose ‘usual place of abode’ is outside the UK.
(1)
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Non-resident Landlord Scheme (NRLS)
If a landlord abodes outside the UK, his letting agent or tenants should operate the Non-resident Landlord Scheme (NRLS). They must use the Scheme to deduct tax from the landlord’s UK rental income and pay the tax to HMRC, unless HMRC has told them in writing that the landlord is approved to receive the rental income with no tax deducted.
The scheme requires UK letting agents to deduct basic rate tax (currently 20%) on any rental income they collect on behalf of non-resident landlords and pay this tax over to HMRC on a quarterly basis.
Non-resident landlords can offset any tax deducted under the NRLS against their tax liability when they complete and file their UK Tax Return.
Letting agents of a non-resident landlord must use the Scheme regardless of the amount of the rent collected and deduct tax from the landlord’s UK rental income and pay the tax to HMRC, but for a tenant who pays rent of £100 a week or less, do not have to deduct the tax before paying the rent to landlord.
Non-resident landlords can apply to HMRC for approval to receive rental income with no tax deducted. HMRC will give approval and register the landlord for self-assessment if their UK tax affairs are up to date or either they have never had any UK tax obligations, or they do not expect to be liable for UK tax for the year in which the application is made.
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(2)
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Capital Gains Tax
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Non-Residents
A Non-UK resident pays Capital Gains Tax either making a gain when selling property or land in the UK or selling of assets which were used in a UK branch of a foreign business.
For properties were sold or disposed of up to 5 April 2020, a Non-Resident Capital Gains Tax Return were required to be submitted within 30 days of completion date of conveyance.
For properties were sold or disposed on or after 6 April 2020, Capital Gains Tax must be reported and be paid using the Capital Gains Tax on UK Property Account within:
- 30 days of selling the property if the completion date of conveyance was between 6 April 2020 and 26 October 2021;
- 60 days of selling the property if the completion date of conveyance was on or after 27 October 2021.
The submission must be completed and be reported to HMRC even if the disposal has has made a loss，no tax to pay, or has already registered a self-assessment account.
Alongside with submission within the days limit, tax liability due must also be paid within the same period. If missing the deadline, penalties and interest may be levied.
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Non-resident companies
From 6 April 2019, Corporation Tax rather than Capital Gains Tax will be charged on gains from UK property or land for all non-resident companies.
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KNOWLEDGE
