When buying or selling a residential property, you should seek tax advice as early as possible. The main UK taxes to consider are – Stamp Duty Land Tax, Income Tax, Capital Gains Tax, Inheritance Tax and the Annual Tax on Enveloped Dwellings.Your tax position will depend on whether or not you are UK resident for tax purposes. It is important that you also consider the tax implications in any other countries appropriate to your particular circumstances.

Stamp Duty Land Tax

When you buy a residential property, you have to pay Stamp Duty Land Tax (SDLT).

The amount payable is a percentage of the purchase price, on a sliding scale as follows:

Click here to see table.

It should be noted that there will be reliefs from the 15% SDLT rate for certain types of business with effect from Royal Assent of Finance Bill 2013 (expected by the end of July 2013).

Annual Tax on Enveloped Dwellings

There is an annual charge on residential property owned by non-natural entities (such as a company, whether UK or non-UK) known as the Annual Tax on Enveloped Dwellings (ATED). The ATED applies to properties valued in excess of £2 million on a sliding scale as follows:

Click here to see table.

The ATED does not apply to properties which are rented on a commercial basis to third parties, or are held for certain development purposes. Various other exemptions also apply.

Value Added Tax

For both UK resident and non-resident owners, VAT will always need to be considered. As a general rule, VAT does not need to be (indeed cannot be) charged on rents to residential tenants. The downside of this is that a residential landlord cannot recover any of its associated VAT costs. However, if any works are to be carried out at a UK property, the UK “zero” and “reduced rates” should be considered carefully as they may reduce the VAT costs incurred (and may allow certain VAT costs to be recovered).

UK RESIDENTS

A. Income Tax

If you personally own a UK property that is rented out, the net rent will be subject to UK Income Tax. This can be at rates of up to 45%. The net rent is the gross rent less various deductible expenses such as management expenses, insurance, repairs and maintenance, the costs of finding new tenants and mortgage interest.

The proceeds of sale of a development property will be subject to Income Tax rather than Capital Gains Tax (CGT) where the property was developed or renovated and sold on for a quick profit.

B. Capital Gains Tax

A sale or gift of your property usually triggers CGT on the gain at a rate of up to 28%. The gain is the difference between what you spent on buying and improving the property and its sale price (or market value in the case of a gift). CGT applies to investment properties and second homes. However, the gain on a gift or sale of a holiday home that was let on a short term basis can in certain circumstances be taxed at the rate of just 10%.

If you are non-UK domiciled, you may be able to avoid CGT altogether on the disposal of a second home or investment property by careful tax planning involving an offshore trust.

If the property is your main residence, any gain on its sale is usually exempt from CGT. Where you have multiple homes (whether in the UK or abroad), you may be able to choose which is to be treated as your main residence. Although you can generally only have one main residence, in some limited circumstances the exemption can apply to multiple properties.

C. Inheritance Tax

The value of your property will generally be subject to Inheritance Tax (IHT) at 40% on your death although certain reliefs and exemptions may apply. Reliefs include the “Nil Rate Band”, which effectively exempts the first £325,000. Gifts between spouses or civil partners are also generally exempt. You can sometimes also deduct any mortgage from the value of the property for IHT purposes.

If you are non-UK domiciled then you can avoid IHT on the property by owning it through a non-UK company. However, this is generally only a solution for properties that are not occupied by you or your family. That is partly because ownership of residential properties worth more than £2 million through a non-UK company is less attractive as a result of the ATED and the extension of CGT to non-UK companies. It may also be more cost-effective to protect against IHT by other methods, such as life insurance.

Non-UK Residents

A. Income Tax

If you personally own a UK property which is rented out, the net rent will be subject to UK Income Tax. This can be at rates of up to 45%. However, if the property is owned through an offshore company, tax on the net rental income will be restricted to the basic rate (currently 20%).

The advantage of ownership through a non-UK company to achieve a lower Income Tax rate needs to be balanced against the ATED and CGT charge where residential properties over £2 million are owned by non-UK companies and occupied by you or your family.

The net rent is the gross rent less various deductible expenses such as management expenses, insurance, repairs and maintenance, the costs of finding new tenants and mortgage interest.

The proceeds of sale of a development property will be subject to Income Tax rather than CGT where the property was developed or renovated and sold on for a quick profit.

The effective rate of Income Tax on the sale of a development property may, in certain circumstances, be reduced significantly if the property is owned by an offshore company and the shareholder is non-UK resident.

B. Capital Gains Tax

If you personally own a UK property, there will be no CGT on a sale or gift of your property at a gain. However, gains made from April 2013 onwards will be taxed at 28% on the disposal of residential property with a value in excess of £2 million by non- UK companies where the property was occupied by you or your family.

C. Inheritance Tax

The value of your property will generally be subject to IHT at 40% on your death although certain reliefs and exemptions may apply. Reliefs include the “Nil Rate Band”, which effectively exempts the first £325,000. Gifts between spouses or civil partners are also generally exempt. You can sometimes also deduct any mortgage from the value of the property for IHT purposes.

If you are non-UK domiciled then you can avoid IHT on the property by owning it through a non-UK company. However, this is generally only for properties that are not occupied by you or your family. This is partly because ownership of residential properties worth more than £2 million through a non-UK company is less attractive as a result of the ATED and the extension of CGT to non-UK companies. It may also be more cost-effective to protect against IHT by other methods, such as life insurance.