I have previously written about the various taxes that relate to the ownership of property in the UK but this article brings all the information together in one handy guide. This is written for the benefit of expats.
There are various taxes that apply with in relation to the ownership of UK property and an overview of each of the main ones is set out below.
Any non-resident Brit who receives rental income from a property is liable to UK income tax as this ‘income arising in the UK’. Tax is payable on the total income above the Personal Allowance, which stands at £12,500 in the 2021/22 tax year. If a property is jointly 1owned, then two sets of Personal Allowances can be used in order to reduce the tax payable.
Anyone who owns a property in the UK and rents it out should complete the paperwork for the HMRC Non-Resident Landlord Scheme which is an arrangement for taxing the UK rental income of non-resident landlords. Generally, tax will be deducted at source, although under this scheme you apply for rent to be paid without the deduction of income tax and you declare the income on your tax return.
The UK budget statement of July 2015 announced changes to the mortgage interest and finance costs that can be offset against rental income. The system of mortgage interest relief will be retained but restricted to the basic rate of tax. The changes are being introduced gradually from 6 April 2017 but will not affect properties that qualify as furnished holiday lettings.
Finance costs will include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. The gradual introduction of the restriction will be as follows:
- 2017 to 2018 – the deduction from property income (as previously allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction.
- 2018 to 2019 – 50% finance costs deduction and 50% basic rate tax reduction.
- 2019 to 2020 – 25% finance costs deduction and 75% basic rate tax reduction.
- From 2020 to 2021 all financing costs incurred will be given as a basic rate tax reduction.
Capital Gains Tax
Changes to how Capital Gains Tax (CGT) is levied on UK property took effect in April 2015.
In essence, any property that is not a Principle Private Residence for the full period of ownership is likely to be liable for CGT on sale. If a property is only let for a limited period of no more than 18 months and/or becomes your home again you would need to specifically review the liability. This will change to just nine months from April 2020.
In general, any property that is not your main residence that is sold after 6th April 2015 will have a liability to gains from this date to the date of sale, provided you have been out of the UK for a number of years. Non-resident individuals will be entitled to the same annual CGT exemption as UK residents, £12,300 in the 2020/21 tax year. If a property is jointly owned then two allowances apply. For gains above the allowances, the rates of tax for capital gains on a property sale are 18% and 28%, depending on your marginal rate, that is the rate of tax applied to any UK income in the relevant tax year and the amount of the gain itself.
More information in this article: UK Capital Gains Tax changes for non-resident UK property owners
Stamp Duty is a tax on property purchase and an increases in the rates payable on buy-to-let and second property came into effect in April 2016. The standard rates apply to a property that will be your principal private residence, provided you own no other property, or if the property you are buying is the only one that you will own, with overseas property being taken into consideration. If therefore, you own property in the UAE and buy your first house in the UK, this will be deemed a second property for the purposes of Stamp Duty calculations.
The current Stamp Duty threshold in England, Wales and Northern Ireland is £125,000 for residential properties, but £40,000 for second and investment properties. The surcharge for second and subsequent properties is 3%.
This is a progressive tax so for example, you might pay nothing on the first £125,000, then 2% on the next £125,000 per the table below.
Stamp Duty Land Tax in England, Wales and Northern Ireland
|Purchase price of property||Rate of Stamp Duty||Buy to Let/ Additional Home Rate*|
|£0 – £125,000||0%||3%|
|£125,001 – £250,000||2%||5%|
|£250,001 – £925,000||5%||8%|
|£925,001 – £1.5 million||10%||13%|
|Over £1.5 million||12%||15%|
A new surcharge for stamp duty land tax (SDLT) will be introduced on 1 April 2021 for buyers of residential property in England and Northern Ireland who are not UK residents. It will add 2% tax to all rates of SDLT payable on the purchase of residential property.
Note that the equivalent of Stamp Duty Land Tax (SDLT the term for England, Wales and Northern Ireland) in Scotland is Land and Buildings Transaction Tax. This is broadly similar and is again charged on a progressive basis.
The current LBTT threshold is £145,000 for residential properties, but £40,000 for second and investment properties
Land and Buildings Transaction Tax in Scotland
|Purchase price of property||Rate of LBTT||Buy to Let/ Additional Home Rate*|
|£0 – £145,000||0%||3%|
|£145,001 – £250,000||2%||5%|
|£250,001 – £325,000||5%||8%|
|£325,001 – £750,000||10%||13%|
From 1 April 2021, if you’re a non-UK resident buying a residential property in England or Northern Ireland, you will have to pay an additional 2% on top of the existing Stamp Duty rates for properties costing more than £40,000. That is in addition to the rates in the tables above.
EDIT – the Stamp Duty for first time buyers in England, Wales and Northern Ireland was cut in the Autumn 2017 budget. See this link for details: Autumn budget 2017 – the facts for expats
EDIT – the UK Summer Economic Statement of July 2020 announced a hiatus on Stamp Duty in England and Wales until March 2021. See this link for details: FinancialUAE – UK Summer Economic Statement July 2020 – the facts for expats
The Stamp Duty exemption in England and Northern Ireland has been extended to properties purchases that complete before 30th June 2021.
It is important to have made proper provision for the various costs at outset and to understand ongoing and future tax liabilities.
For further information on buying property in the UK and obtaining a mortgage, please see this recent article An expats guide to buying property in the UK
If you would like advice on arranging a mortgage, simply want to find out about your options (for both the UK and the UAE), or have any queries about any aspect of personal financial planning, please contact me at email@example.com
Article last updated April 2021