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Tax - When You Buy and Sell Property

Tax!!! Every citizen of United Kingdom is bound to pay tax if one is getting an income. Income not only means the amount that one gets from his salary. It also includes others.

It includes

  • Usual Wages
  • Benefits
  • Saving Interest
  • Pension

When you receive more than a specified amount then you need to pay tax.

Apart from the above incomes, one has to pay tax when he or she buy or sells a property. Here is a detail explanation on tax paid during purchase or sale of a property.

Tax when you buy

When one purchases a property for his future, it can be considered as

  1. Direct property investment
  2. Indirect property investment

based on the purchase. In either case, one has to pay stamp duty land tax to the government based on whether it is a residential or non-residential property and if it is more than £125,000.

  1. Direct property investment:

When a person buys a part or whole of a property himself or herself then it is considered as direct property investment and the person has to pay tax when you buy or sell property. As time passes, the value of the purchased property will also increase or decrease based on the market value.

With the purchased property, one can live in it or rent it. The tax varies depending on whether you live in it or rent it as renting or letting out is a type of investment.

  1. Tax for residential letting

When it comes to letting your home, the profit you receive as income has to be considered for tax. There are also possible deductions in these cases

  • Letting agents fees
  • Repair or renewal allowance( in case of letting furnished house)
  • Council tax
  • Building insurance


  1. Tax for holiday letting

A property considered as holiday letting can have tax deduction only when the property is available for at least 210 days a year, have been let out for at least 105 days and have not let out to anyone at a stretch for more than 31 days. The main deductions include

  • Agents Fee
  • Capital allowance for furnishing the property
  • Repair or renewal allowance

 

  1. Tax for Rent a room:

This can be considered as residential letting or in rent a room relief scheme. It can be considered for rent a room relief scheme only if the rented room (not home) is accessible from the claimant’s house and not separately.  The possible deduction for the tax is one need not pay tax for the first £7,500 rent.

Wear and tear allowances and any loss amount cannot be deducted.

  1. Indirect property investment:

Here, the investment is made in the form of a share, fund or schemes that are approved by a public body. This includes

  • Land banking schemes
  • Real Estate Investment Trusts (REIT) – The tax is calculated differently for ring-fenced property letting business and non ring-fenced activity business.
  • Shares in property companies

In this case, a person cannot be a sole owner of the entire property. So, he can pay the tax in two ways

  • Either as a single payment based on the market value of the property or
  • Pay in stages.

Exemptions:

Whether it is a direct or indirect property investment, there are certain exemptions that can be considered for paying tax. They are

  • If the property is left to you in will
  • If the property is transferred as divorce settlement
  • If you buy freehold property that costs you less than £40,000
  • If you purchase a property that was in the lease for 7 years or more and if the premium and annual rent are less than £40,000 and £1,000 respectively.


Tax when you sell

As you will profit from selling your property, you will have to pay tax to the government. The tax one has to pay varies depends on whether it is a property or home.

Selling your Property

Here, the property indicates not your home that you live in. It refers to properties that are

  • Business premises
  • Buy to let
  • A mere land
  • Property inherited from others

If you sell one or all the properties then you must keep in mind that you will have to pay the Capital Gains tax as you will receive a lump sum of money when you sell it.

In that case, one has to calculate on how much does he or she must pay the tax based on the gain he receives, which is generally the difference between the amount that was used to buy it and the amount that is received during the sale.

Exceptions:

There are certain exceptions on paying the Capital Gain Tax. One need not pay the tax if

  • The property is a gift to charity, civil partner or your spouse
  • The property is a business asset
  • It has been inherited from others

Selling your home

In this case, home implies that you live there. In such cases, you will have lot of exception for paying your Capital Gain Tax

Exceptions: Below are the exceptions which will have private residence relief for paying the Capital Gain Tax.

  • If you have lived in your home for throughout the period till you intend to sell it.
  • If you have not let or used part of it only for business
  • If the entire home is very small less than 5000 square meters
  • If your home is occupied by one of your dependent relatives

If above are not the cases that you undergo then you have to pay the tax. In other words, if you let out your entire home or part of your home then you will have to pay the tax based on how long you lived in your home.

How to calculate the tax when you sell your property:

  • Calculate the gains from each asset.
  • Calculate the deductions and deduct it from the gain.
  • If the calculated gain is less than the Capital Gain Tax Allowance, then you need not pay the tax else you will have to pay the calculated amount.

So, calculate and pay the tax when you purchase or sell the property and be a good citizen. It may be a good idea to have a legal opinion if you are dealing with a lot of money.

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