Property Tax – The Ownership Lifecycle

Regardless of whether you buy a property to live in as your main home or as an investment to rent out, there are different tax liabilities that may arise at different stages of the lifecycle. Some of the tax trigger points that may arise in respect of a residential property are discussed below.

The first stage in the property lifecycle is the acquisition of a property. If you buy a property in England or Wales, depending on the value of the property, you may have to pay stamp duty land tax (SDLT). From 1 April 2015, SDLT is not payable in Scotland, but you may have to pay land and buildings transaction tax instead. 

The structure of SDLT was reformed from 4 December 2014. From that date, SDLT is calculated progressively in a similar way to income tax, with the rate for a particular band being applied to so much of the purchase price falls within that band. Prior to 4 December 2014, a single rate applied to the whole purchase price depending on which band the purchase price fell within. The rates applying from 4 December 2014 are as follows:

First £125,000 £0 to £125,000 0%

Next £125,000 £125,001 to £250,000 2%

Next £675,000 £250,001 to £925,000 5%

Next £575,000 £925,0001 to £1,500,000 10%

Balance Above £1,500,000 12%

Christine buys a house, the purchase price of which is £600,000. She has to pay SDLT of £20,000, calculated as follows:

On first £125,000 @ 0% £0

On next £125,000 @ 2% £2,500

On next £350,000 @ 5% £17,500

On total purchase price of £600,000 £20,000

If the property is purchased by a company the rate is 15% on properties costing more than £500,000, although normal rates apply rather than the punitive 15% rate if the property is used for a property rental business or development or resale trade.

SDLT may also be payable on a residential lease.

Living in the property as your home

Tax (other than council tax) is not normally payable when you are living in a property as your main home, unless you let out rooms or work from home. If you have more than one property, such as a city flat or weekend cottage in addition to your family home, you will need to consider which you elect to be your main residence for principal private residences purposes, as this will impact on any capital gains tax payable on the eventual sale.

If you work from home, there are various tax aspects to consider. If you run your business from home as a sole trader or in partnership, you can claim a deduction for a proportion of the running costs of the home (e.g. light, heat, insurance, etc.) as a deduction in calculating your business profits. The amount claimed should be apportioned on a ‘just and reasonable’ basis. 

For example, if you have ten rooms and use one for work, you could claim a deduction for one-tenth of the running costs of the home. Alternatively, you could save admin and use the simplified deduction scheme to claim a fixed rate deduction based on the number of hours for which you use your home for business each month. The monthly deduction is £10 where business use of your home is between 25 to 50 hours each month, £18 where business use is between 51 and 100 hours a month, and £26 where your home is used for business more than 100 hours per month.

Claiming a deduction using the simplified expenses flat rate will save work, but do check that a deduction based on actual costs is not significantly higher.

If you run your business as a company, you can deduct bills paid by the company in relation to the property in working out its profits for corporation tax purposes, but beware of triggering a benefit-in-kind charge if the company pays personal bills.

It is also necessary to consider the potential capital gains tax (CGT) consequences of working from home. If a room is used exclusively for business purposes, that room will not be eligible for private residence relief on the ultimate sale. If the chargeable gain is likely to be small and the annual exemption is available, this may not cause much of a problem in practice. However, ensuring the room is not used exclusively for business will prevent the potential CGT problem from arising.

If you rent out a room in your home, you can take advantage of rent-a-room relief to earn tax-free rental income of up to £4,250 a year. Under the scheme, profits from letting as furnished accommodation your main home are tax-free if the receipts are £4,250 a year or less.

If you buy the property as a buy-to-let and rent it out, you will need to pay tax on your rental profits. The same applies if you decide to rent out your own home for part of the time that you own it. If you have more than one UK rental property, you work out your taxable profits for the property rental business as a whole taking account of all rental income and expenses for all UK let property. 

In calculating your taxable profits, you can claim relief for associated expenses. These will be the expenses that the landlord needs to incur in the day-to-day running of the property rental business. This will include repairs, utility bills, marketing, advertising, agents’ fees, cleaning costs, accountancy fees and such like. Relief for capital expenditure, such as improvements to the property, is not allowed against profits but is taken into account in working out any gain from sale. 

If you make a loss on your property rental business, the loss can only be carried forward and set against future profits from the property rental business. It cannot be relieved against general income.

If your property has been your only or main residence throughout the time during which you have owned it, there is no CGT to pay when you come to sell it, as you will be able to benefit from the main residence exemption (also known as the principal private residence exemption).

If you have always let the property out, PPR will not be in point and you will need to work out any chargeable gain arising. In calculating the gain you can deduct the costs of acquisition, any improvement expenditure and costs of both buying and selling the property. If the gain is more than the annual exempt amount (£11,100 for 2015/16) CGT (at 18% or 28%) is payable on the excess.  Each spouse has their own exempt amount, so a couple can shelter a gain of £22,200 before CGT is payable. 

If the property has been your main residence for some of the time and let at other times, part of the gain will be sheltered by the main residence exemption and you may also qualify for lettings relief. 

Where a property has been your main residence at some point, the last 18 months of ownership are generally exempt from CGT.

If you die owning a property, the extent to which any inheritance tax (IHT) is payable will depend on who the property is left to and the availability of the IHT nil rate band (currently £325,000).

No IHT is generally payable on anything left to a spouse or civil partner. However, if you leave your home or an investment property to your children, IHT may be payable if your nil rate band has already been utilised. However, if the property is covered by the available nil rate band, it is possible to pass it on tax-free.

Different taxes may be payable at different stages of the property lifecycle. Therefore when joining the property ladder it is essential that a ‘cross-tax’ approach is taken, to ensure that nothing is overlooked.