The current property taxes that are payable in the UK are the following items: First is the UK Personal Income Tax; Second is the Local Property taxes or also known as Council Tax, Third is the Capital Gains Tax (CGT); Fourth is the Stamp Land Duty Tax (SLDT) and lastly is the Inheritance & Gift Tax. This view has been supported by the Property Tax International (2008).
Bryant (2008, p. 95), income tax is only due on taxable income that is above the tax-free allowances of individuals. To illustrate, for the year 2008-2009, the basic personal allowance is £5,435, which is a tax-free amount for those individuals who have reached below 65 years of age. As an example, the Income Tax bands for the year mentioned (2008-2009) they are the following: The starting band rate is £2,320; the basic rate band is £2,320 up to £36,000; and a higher rate band of £36,001. For the mentioned tax period, the Income Tax due after all tax-free allowances have been deducted on earned and rental income shall be 10% for the income which falls within the starting rate band; 20% where the amount shall fall above the starting rate band, but is still within the range of the basic rate band; and 40% where the amount shall fall within the higher rate band. This view has been supported in the work of Bryant (2008).
The Local Property taxes or Council Tax are applicable in UK and where the liability shall be paid by the tenant who resides in the property. The amount of tax shall be computed on a daily basis and shall be different per region.
In terms of Capital Gains Tax (CGT), the profit of the individuals arising from the sale of a property that has been purchased to let out shall be considered as a capital gain for taxation purposes. Only residents of UK shall be subjected to CGT, which is a type of a territorial tax that is applied. Hence, in the case of a non-resident individual belonging from a different nationality, such person is exempt from paying CGT in case the investment property in UK shall be disposed. Hence, in the case of an Irish individual, he or she shall only be liable to pay CGT of 20% of the actual gain and is payable in his or her country, Ireland subject to their tax rules. However, the UK government is strict in the implementation of anti-avoidance rules that occurs in the event that there are taxpayers who realize capital gains on their properties that are located in UK as they enjoy being temporary non-residents of said country. This view has been supported by the Property Tax International (2008).
In order to compute the capital gain, it is essentially the difference between the purchase price at the time the property was originally acquired and the price of the property at the time it was sold after deducting the allowable deductions which shall include: First: All the purchase and selling price of the property shall be deducted from capital gains tax (CGT). However, allowances, relief and exemptions shall be applied, especially if the property has been the primary residence of such individual; Second: The single rate of 18% shall be charged on the CGT for the year 2008-2009; and Third: There is annual exemption of a capital gains allowance for each individual for the taxable year 2008-2009 in the amount of £9,600. This view has been supported in the work of Bryant (2008).
Capital Gains Tax has been defined as a tax that is imposed on the profit or gain that is earned by an individual when he or she sells, donates or disposes personal assets which shall include shares and real property. Based on the present CGT rules in UK, the non-UK residents shall not be charged for gains or profits that arise from the selling, donating or disposing of residential property located in UK. Hence, it simply means that a non-UK resident who is pursuing to make arrangements for the purpose of avoiding the charge for that year has a financial advantage over a resident of UK. Therefore, it is imperative to provide extension for the CGT in order to back-up the yearly charge. In the same manner, such a proposal develops equal tax treatment between the UK residents and non-residents because they are regarded as individuals in equal footing. At the same time, it will make the UK tax policy in harmony with the existing policies of other countries, which have implemented the same tax capital gains treatment applied to non-residents. This view has been supported by the HM Treasury (2012). This ensures the fair taxation on the residential property transactions of individual tax payers.
The treatment of profits made on a sale transaction as a capital gain can be considered as an advantage that the buy to let investor has over those people who buy to sell the properties later on. The latter transaction is regarded as trading property to earn profit is considered as an income generating transaction from the act of selling. Hence, all income that flowed from the sale transactions shall be considered as income of the individual and shall be taxable. For taxation purposes, these transactions are considered as income. This view has been supported in the work of Bryant (2008).
Another kind of tax is a Stamp Duty Land Tax (SDLT). SDLT is a transaction tax that is imposed upon the buyer, for the purchase of property or land and the interest that is acquired for the land or property. The taxable amount shall be chargeable on the price or consideration that has been paid for the land and property and the interest earned for land and property. SLDT has been identified as an indirect tax on property ownership that is directly paid to the Inland Revenue from the time of the purchase of the property, which included those properties that cost more than £125,000 based on the following price bands:
|Property up to £125,000||No stamp duty|
|Property between the range of £125,000- £250,000||Stamp Duty at 1%|
|Property between the range of £250,001- £500,000||Stamp Duty at 3%|
|Property between the range of £500,001-£1,000,000||Stamp Duty at 4%|
|Property between the range of £100,000,001-£2,000,000||Stamp Duty at 5%|
|Property priced at £2,000,001 and above||Stamp Duty at 7%|
|Property priced at £2,000,001 and above purchased by certain non-natural persons||Stamp Duty at 15%|
(Source: HM Treasury, 2012).
When a person buys his or her property by using own funds, such persons shall be considered as the sole owner. Such individual has the right to sell, transfer and dispose the property and can even have it rented. In case the owner decides to let it out to a tenant, the individual may charge rental fees, even if the property has been mortgaged, depending on the arrangements made with the lender (Barclay, 2011). While in the process of buying of the property, it will be the solicitor who shall be acting on behalf of the buyer to seek for information about the property that can affect the desire to buy to determine then legal issues surrounding the property involved. The vital information that will be asked by the solicitor may include the drainage and water supplies by asking the local council and the holder of the property. It shall be the buyer’s solicitor who shall determine the amount of stamp duty land tax (SDLT) that has to be paid to the government in the case that the property shall exceed the threshold amount fixed for the year of purchase of such property. Based on the table above, if the property cost is less than £125,000 there is no need to pay SDLT. However, if the property costs exceeds over £125,000, there is a need to pay 1% of SDLT of the total consideration of the property. In the same manner, SDLT shall be charged at 3% of SDLT on properties that cost between £250,000 and £500,000 and 4% of SDLT for those properties that cost over £500,001.
The 7 percent rate of SDLT is a relatively new concept that was announced during recent the Budget in order to ensure that the individual property owners of high costing residential properties shall be paying a fair share of tax on their property transactions. This brand new SDLT rate shall be made applicable to all residential property transactions staring 22 March 2012 onwards (HM Treasury, 2012).
The Inheritance and Gift Tax in UK is chargeable on the basis of the common law principle of domicile. For those non-residents who are domiciled taxpayers and holds properties in UK, the inheritance tax is still applied since the situs of the assets is UK, or where these properties can be located. Hence, it will be possible for a non-resident of UK to subject his or her properties to inheritance tax though they live abroad but have not established a domicile of choice. This view has been supported by the Property Tax International (2008).
For individuals in UK, they will also have to consider a tax planning strategy which can be included in the last will and testament in order to safeguard the interest of the family upon the death of a person which must be formalized with the help of a lawyer. If the Net Worth of an individual will reach over £312,000, the threshold of inheritance tax must be planned for an effective estate tax planning. Majority of the individuals who live in UK shall fall under this tax net on the basis of the value of their homes, especially for those persons who live in London and the southern-east side. The best legal advice that a lawyer can give to his client of husband and wife is that the properties must be owned as “tenants in common in equal shares”, instead of being only regarded as joined tenants. In this manner, each of the partners will be leaving the first £312,000 of their net worth to be passed on through the last will and testament to their children, in a discretionary trust of one of the partners. At the onset, this arrangement will save the children on inheritance tax in the amount of over £100,000. This set-up of discretionary trust will leave their children with no legal right to possess the properties before the death of the second partner. This is due to the fact that the property will be dispensed with the inheritance tax on the properties that is supposed to be due. When the time comes the second partner dies, the children will not be held liable for the inheritance tax on the first portion of £312,000 (Bryant, 2008). If such arrangement does not take place, all the wealth that is owned by the first partner shall be transmitted or inherited by the second partner automatically, being the next of kin. Upon their death, the children will not be burdened of paying higher tax rates.
Another tax consideration is the Furnished Holiday Lettings (FHL) properties which are treated in a different manner from other properties for purposes of taxation which are considered as useful for a property investor as one of the tax benefits that are applied to income not actually traded. The VAT that is applicable in UK for the purchase of property is 20%.
Income Tax Computation
For purposes of computation of the income tax of the taxpayer, all sources of income must be aggregated and each type of income must be shown separately as follows:
1.) Non-savings income which shall include compensation income, employment income, property income and trading profits;
2.) Savings income other than dividends. Those persons who receive bank and building society net of tax of 20%. The gross amount of the income will be entered in the computation and any income that is received net of tax which grossed up at 100/80. These types of interest will include National Savings Bank interest and interest on loans between individual persons that are received as gross. This view has been supported in the work of James (2009);
3.) The dividends that are received from the UK corporations. They carry a tax credit of 10/90 coming from the net dividend. Hence, in order to be computed in the computation, the dividend must be grossed up by 100/90, wherein a tax credit is deductible from the liability. Here, when the dividends that falls within the starting and the basic rate bands, no additional liability shall be imposed. No tax credit shall be given if there is no tax liability. This view has been supported in the work of James (2009).
There are also interests that shall be made applicable on the following loans, which are paid as gross and can qualify to tax exemption that shall be deducted from the total income as follows:
1.) The loan to purchase a plant and machinery that is being used in the business by a partner and an employee;
2.) The loan to purchase interest in an employee-controlled corporation;
3.) The loan to purchase an interest in a partnership or to contribute to the capital of a partnership;
4.) The investment made on a cooperative.
When only a portion of a loan is used to one of the specific purposes mentioned, a deduction may only be applied for the interest of the part of the loan that was used for the qualifying purpose. This view has been supported in the work of James (2009).
For married persons who own joint properties or shares, the HM Revenue and Customs shall presume that the shares are owned equally and set aside the half portion of the properties to each of the partners. This presumption shall not be made applicable on certain types of income, where the most important of being a partnership income and income from furnished holiday letting (James, 2009). However, the couple shall be given the option of electing a portion of the income to the non-working spouse who can use the money for his or her personal expenses. Before such arrangement shall be allowed by HMRC, the election must be made reflecting the facts if one of the spouses wishes to transfer only a portion or the entire income to the other spouse by making an outright irrevocable gift of such asset intended to be donated. To illustrate, where an attempt is made to transfer dividend income to the other spouse while at the same time retaining ownership of such asset, the HMRC can invoke anti-avoidance settlement rules (James, 2009).
Splitting of the Property
There are instances when a married couple breaks apart and they are left with conjugal properties to settle, especially in the case of a family home. The division of the property shall be dependent on various circumstances such as in the case the property is owned by only one of the partners or by joint tenants. In such an incident, the couple can agree on various arrangements such as making the property owned by one only of them or sell the property and equally divide the proceeds of the sale between the two of them. This view has been supported in the work of Barclay (2011). In the event that they cannot agree on how to divide the property, they have the option to refer the property for Mediation.
However, no capital gains tax shall be imposed on proceeds of the sale if the only main residence is the family home. If such individual has more than one property, the family home cannot be sold to a third party. For the computation of the capital gains tax (CGT), the 40% percent shall be imposed if the profit exceeds £8,800 after inflation and the annual exemption has been included.
Manual System to Keep Track of Property Business Income and Expenses
It is important the individuals must be able to retain documentation that will be used for the computation of tax for 22 months after the tax year’s filing date. It is essential that documents such as invoices, receipts, bank and credit card statements, purchase and completion statements and improvement costs must be included in the computation of property tax. This view has been supported by the work of Sims (2008). The invoices are records of the income that has been received from the property. For some of the property investors, they just allow their letting agents to give them copies of their monthly rent statements. It is also vital to keep the receipts for the goods and services paid to run the business such as the basic utility bills of telephone, electric and water bills. The credit card and loan statements must also be well-intact to keep track of the mortgages and loans to determine how much of the capital and interest have been actually paid. By splitting the figures of capital and interest, it will be easier to determine the computation of taxes for filing for that year. The purchase and completion statements shall indicate the purchase price, incidental cost for the purchase of the property to include the legal costs and the stamp duty. The improvement costs on the property such as repairs and renewals to the property shall increase the value of the property by adding a porch, an extension or a garage. Such improvements shall fall under the category of purchase and completion statements since they are capital costs. Here, there is a need to differentiate the daily maintenance repairs that are dissimilar with one-time improvement costs that will be have to be recorded in the property register. The profit and loss computation must be accurate in order to avoid the payment of enormous fines that can be imposed.
The daily maintenance and repairs of the property shall be considered as revenue expenses. This is opposed to capital costs which can include upgrading of the property to make it more valuable by installation of expensive fittings, such as upgrading of the rooms to include modern equipment. Capital costs are one-off expenses that are incurred such as stamp duty land tax (SDLT) and solicitors fees when a new property is acquired; improvement of a property such as building of a porch and garage and installation of costly and high-end fittings; and disposition of properties by payment of estate agent’s fees. The disposition of the property shall subject the individual to Capital Gains Tax (CGT).