Are UK property taxes high?
Please be advised that the information in this article regarding QNUPS and IHT is no longer accurate due to the recent changes announced in the UK Budget. Starting in April 2025, the regulations will have significant implications that may affect your understanding of these topics. We encourage you to stay informed and consult with a Soteria Trusts expert to navigate these changes effectively.
The United Kingdom is a country with many different types of taxes, most of which are high when compared to other countries. The ones that affect property owners the most are income tax, capital gains tax, and Stamp Duty Land Tax. A 2019 Tax Foundation report found that property taxes accounted for 12.4% of total tax revenue in the United Kingdom. So, are UK property taxes high? In our opinion, yes, especially when you realize that you may have to pay taxes on property when you purchase it, rent it, sell it, and eventually, pass it on as an inheritance.
What are property taxes?
Property taxes are defined as either one-off or recurrent taxes on the ownership, use or transfer of property. These include taxes on immovable property or net wealth, taxes on the change of ownership of the property through inheritance or gift and taxes on financial and capital transactions.
Property taxes in the UK
There are six different taxes which are levied directly or indirectly against property in the UK. These are
(1) Stamp Duty Land Tax,
(2) Income and/or corporation tax on any Rental Income,
(3) Council Tax, a tax paid each year on the rateable value of the property,
(4) Capital Gains Tax on profits made when selling an investment property and if the property value exceeds certain thresholds,
(5) Annual tax on enveloped dwellings, levied against properties held in certain structures such as trusts, and finally;
(6 Inheritance Tax following your death.
Stamp Duty Land Tax
When you buy or transfer land or property in the UK, and the transaction value is over £40,000 you must pay Stamp Duty Land Tax (SDLT). Currently, SDLT only applies to residential properties valued at more than £125,000, or to non-residential land and properties bought for more than £150,000.
Related: Latest SDLT Rates
Income Tax (on rental income)
The amount of tax you pay on rental income relies primarily on how much profit you make. As a landlord, you are charged tax on your net rental income, which is your total income minus any permissible costs. If your annual rental income is:
- Less than the basic rate threshold of £12,570 – you’ll pay 0% in tax on rental income.
- Above £12,570 and below the higher rate threshold of £50,270 – you’ll pay 20% income tax
- Above £50,270 and below the additional rate threshold of £150,000 – you’ll pay 40% income tax
- Additional rate for annual income in excess of £150,001 – you’ll pay 45% income tax
Council Tax
This is a tax paid by everybody over the age of 18 irrespective of whether they are a property owner or not. If you are age 18 or above, the property at which you reside will be taxed based on your occupancy.
There are a series of bands that individual properties are placed into based on their rateable value. In England, the rateable value given is the value the property would have sold for on the open market on 1st April 1991. The funds collected by the local council are used to provide services such as maintaining roads, refuse collection and meals on wheels for the elderly and infirm.
Capital Gains Tax
You will have to pay Capital Gains Tax if you make a profit when you sell an investment property, CGT does not apply to your primary residence and any profit when you sell it. The CGT rate on UK property is 28% on the gains made from 1st April 2015 until the date of the sale. Long-term owners of investment property will be pleased to know that there is no CGT on gains made prior to April 2015.
Related: Taxes when selling a property in the UK
Inheritance Tax
Inheritance Tax also referred to as IHT, or Death Duty is a 40% tax levied on the net value of the deceased estate above the Nil Rate Bands of £325,000 for singles or £650,000 per couple. Use this simple Inheritance Tax Calculator to work out if your estate will be charged this tax, too.
Annual Tax on Enveloped Dwellings (ATED)
ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000. An ATED return is required to be completed where your company owns a dwelling in the UK that is valued at more than the minimum threshold. The annual tax payable is determined by the property/portfolio value and ranges from £3,800 to £244,750 per annum when the value exceeds £20m. There are several reliefs available that you should check out before purchasing a property in a company or a trust.
UK Property Taxes for Non-Residents
Her Majesty Revenue and Customs (HMRC) will classify you as a ‘non-resident landlord’ if you live abroad for six months or more each year, even if you are a UK resident for tax reasons. If you have Non-Resident status, your property taxes will differ compared to being a UK Resident.
Stamp Duty Land Tax
From April 2021, Non-UK Residents must pay an SDLT surcharge of 2% above the residential rates.
UK Rental Income Tax Rates for Non-Residents
The rates are the same as for the UK Resident taxpayers, the one difference being that the letting agent who collects rent has to deduct 20% at the source which they pay to HMRC as a tax on rental income. Overseas landlords can complete and submit form NRL1, the Non-Resident Landlord Form to be granted permission by HMRC to receive rents gross. calculate the right amount of income tax due.
Non-Resident Capital Gains Tax
April 1st, 2019, saw the introduction of a new set of rules on how much Capital Gains Tax you will pay as a Non-Resident. NRCGT uses a more complex formula than CGT, too detailed for this article so please refer to the HRMC website for detailed information.
Inheritance Tax
The rules surrounding Inheritance Tax might differ if you are a non-resident, especially if you’ve become non-domiciled. If you’re deemed Non-UK domiciled, only your UK-sited assets will fall under the IHT net, and your worldwide assets will not. However, even if you are a non-Resident for tax purposes, but you are still deemed the UK domiciled, your worldwide assets will be charged to IHT following your death.
Can I lower my UK Property Taxes as a landlord?
In the United Kingdom, you pay tax when you purchase a property when you make money from it via rental income, when you sell it for a profit and when you pass it on as an inheritance. All of these can eat up a significant chunk of the property’s value. There are, of course, tax mitigation strategies that can help both UK residents and non-UK residents alike to minimize the property tax burden.
The Property Pension
The solution that we at Soteria Trusts believe is the most efficient and helps you minimise the property taxes you would ordinarily pay when you hold the property in your own name, is a certain type of Pension. Internally, we call it a Property Pension, but the official name is Qualifying Non-UK Pension Scheme (QNUPS). It is a specific type of pension that is recognized by HMRC, and as the name suggests is established and operates from outside of the UK.
Related: Private Pensions and IHT
Although a QNUPS is a pension, it differs from traditional UK domestic pensions in the way that it can hold multiple asset classes within, including investment property, cash, art, wines etc. Moreover, the rules of the Property Pension allow for the assets held within sitting outside of the member’s estate on day one and therefore are free of Inheritance Tax, in addition, any Capital Gains Tax charge that would ordinarily take place is removed completely when a property that is held within the pension, is sold.
To learn more about this solution, we invite you to join our monthly educational webinar or contact us directly for a one-on-one meeting to see if the QNUPS route is the right choice for you.
