What you need to know about residential property taxes
Over the last few years, residential property taxes have undergone significant changes with further reforms to come this year. Both individual homebuyers and property investors need to be aware of the potential impact of some of these changes. Here we provide an up-to-date overview of residential property taxes and what they could mean for you.
What is Stamp Duty Land Tax and who is affected?
Stamp Duty Land Tax (SDLT) is a one-off tax you may have to pay when you buy a property. Properties of over £125,000 (or £40,000 for second homes). This applies to both leasehold and freehold properties. SDLT for a property bought for £275,000 is calculated like this: 0% on the first £125,000, 2% on the next £125,000 and 5% on the last £25,000.
First-time buyers are exempt from SDLT unless the property costs over £300,000, and then they will have to pay tax on the amount that exceeds £300,000 up to a limit of £200,000.
SDLT is charged at a rate of 15% on residential properties of over £500,000 bought by ‘non-natural persons’ which means companies and collective investment schemes.
Second properties are subject to an additional 3% surcharge on top of SDLT. This affects those who buy properties as an investment including buy-to-let landlords. The surcharge also has consequences for others. For example, if a new couple buys a home together but one of them has not yet sold their current home then the home they are buying will count as a ‘second property’ and will be subject to the additional 3% charge. The same applies to anybody who buys a new home without having sold their old one first. The good news is that SDLT can be reclaimed if the old property is sold within 36 months of the purchase of the second property.
The 2020 Budget is likely to bring changes to SDLT. A 3% surcharge for overseas homebuyers including ex-pats wanting to move back may be introduced. This will be charged in addition to all other SDLT that they have to pay including the 3% surcharge payable on second properties.
Can I avoid Stamp Duty Land Tax?
You cannot avoid Stamp Duty Land Tax but, depending upon your situation, you may be able to avoid the 3% surcharge payable on second properties.
Those who are temporary second homeowners because, for example, they or their partner have not sold a property before they buy a new home together are liable for the charge although, as we said above, they can claim it back later. However, that still leaves them with the problem of finding the money in the first place. One way around the issue is to take out a bridging loan which can be paid back once the first property is sold.
A parent buying a property for a child will be classed as a second homeowner and liable for the 3% charge, but only if their name is on the property deeds. The charge can be avoided by not making themselves an owner or a joint owner. They could gift a deposit, act as a mortgage guarantor, or get a family to offset mortgage instead.
Those who own two properties because they are going through a divorce are exempt from the extra charge if they organise a Property Adjustment Order through their divorce lawyer.
People who wish to buy a second property as an investment or a buy-to-let can avoid the charge if they purchase a property worth less than £40,000; or a caravan, mobile home or houseboat.
Income tax changes
If you purchase a buy-to-let property you can currently deduct 25% of your mortgage interest payments from your rental income with the remaining 75% of mortgage interest payments qualifying for a 20% tax relief.
From April, no mortgage interest payments will be deductible from rental income but 100% will qualify for 20% tax credit. In real terms, how much tax landlords will actually pay depends upon their tax bracket. However, the changes mean that all landlords could end up paying more tax, and those in higher-income brackets are likely to see a significant increase in their tax bill.
Also from April, non-UK companies with a UK property rental business will be liable for Corporation Tax (at 17%) instead of Income Tax (at 20%).
Inheritance Tax is a one-off tax that is payable on inherited estates worth over £325,000. There is a ‘residence nil rate band’ of £150,000 to add to this threshold when the main residence is passed on to a direct descendent, giving a total allowance of £457,000. The Inheritance Tax rate is 40% on the part of the estate above the threshold.
It is possible that an Inheritance Tax cut may be announced in the Budget and there may also be changes to complex exemptions and reliefs. The All Party Parliamentary Group on Inheritance and Intergenerational Fairness (APPG) has proposed that inheritance tax is replaced by a 10% tax on estates up to £2 million and 20% on those above that value.
Whether you own a second home, or you are a landlord with an extensive property portfolio it is important to consider how you will pass on your assets in the most tax-effective way.
Your family will need to pay the Inheritance Tax due on your estate within six months of your death, and when your estate includes property you will need to consider how they will pay before they have sold. There is also Capital Gains Tax to consider (see below).
It’s wise to start succession planning early by speaking to a tax lawyer who will help you to protect your family’s financial future.
Capital Gains Tax
Capital Gains Tax (CGT) is payable on any profit you make from a property that is not your home. This includes buy-to-let properties and inherited properties. Where a property is being sold by a limited company, Corporation Tax is payable instead.
In the tax year 2019-2020, CGT is payable on gains exceeding £12,000 but this threshold could change with the Budget. The amount of CGT is calculated after costs such as Stamp Duty Land Tax, estate agent’s fees, solicitor’s fees, and surveyor’s fees have been deducted.
When a property is inherited, CGT will need to be paid if the property has risen in value between the owner’s death and the date of the sale.
In April 2020 there will be changes to CGT which will affect landlords:
CGT is to be paid within 30 days of completion of the sale instead of the following tax year through self-assessment.
Landlords who used to live in a property but rented it out for the last 9 months before they sold it can claim Private Residence Relief (PRR) for this period. This has changed from 18 months.
Lettings relief, which significantly reduced some landlord’s CGT, is effectively scraped because very few landlords are eligible. 
Non-Resident Capital Gains Tax
People who do not live in the UK (including UK citizens living abroad) are subject to Non-Resident Capital Gains Tax (NRCGT) when they sell a UK residential property. Gains are taxed at between 18% and 28%.
If you have lived in a property which is now a buy-to-let it is worth seeking professional advice since there is considerable scope for reducing the tax payable.
From April 2020 you will not be able to defer payment of CGT through your Self-Assessment tax return and must pay within the 30-day reporting and payment period.
How can QualitySolicitors help?
Our property tax lawyers continue to monitor changes in the law so that we can offer up-to-date advice to our clients. We can assist you with financial planning matters, limiting the tax implications of residential properties.
At QualitySolicitors we use plain English so that you understand this complex area of law, enabling you to make the best decisions for you. To arrange an appointment today call 08082747557
 The Guardian, The budget: what it might mean to you, https://www.theguardian.com/uk-news/2020/feb/22/the-budget-what-it-might-mean-to-you
 Moneysupermarket.com, Bridging loans, https://www.moneysupermarket.com/loans/bridging-loans-guide/
 This is Money, Seven ways to get your child a first home, https://www.thisismoney.co.uk/money/mortgageshome/article-6774663/Seven-ways-child-home-New-ways-help-kids-property-ladder.html
 Gov.UK, Inheritance Tax, https://www.gov.uk/inheritance-tax
 Lexology, Could Inheritance Tax Be Cut to 10 percent? https://www.lexology.com/library/detail.aspx?g=2985bd96-61ee-46cd-ba58-b7faa63cf302
 BuyAssociation, New capital gains tax laws for 2020 for landlords and property investors, https://www.buyassociation.co.uk/2019/10/21/new-capital-gains-tax-rules-for-2020-for-landlords-and-property-investors/
 Gov.UK, Get ready for changes to Capital Gains Tax payment for UK property sales, https://www.gov.uk/government/news/get-ready-for-changes-to-capital-gains-tax-payment-for-uk-property-sales