While governments often wax lyrical about simplifying the UK taxation system, it only seems to get more complicated. Take the potential tax charge on selling a property and any resulting capital gains. You could understand different rates for personal and business transactions; surely that must be about it?
How many different rates of tax are there?
As you will see, the rate of tax charged on the sale of property ranges from 0% to 45%! To simplify a relatively complex subject, we will look at personal and business transactions separately.
There are many different issues to consider concerning personal investment in residential and non-residential property. A further split between residents and non-residents of the UK makes the situation a little more complex.
Principal Private Residence
As the vast majority of homeowners in the UK only own one property, their principal residence, they will likely qualify for private residence relief. This means they will pay 0% tax on capital gains when selling their home. Aside from the primary residency condition, to qualify for the relief, there are other conditions:-
- No part of the property has been used exclusively for business purposes during the period of ownership
- The property, including gardens and grounds, is not greater than the permitted maximum area
- You have not been absent from the property, aside from allowed periods of absence, during the period of ownership
If a property were your principal residence for part of the ownership period, then any relief on capital gains tax would be prorated. After considering your capital gains tax allowance, any remaining gains are added to your taxable income. If you remain within the basic income tax band, you would be charged 18% on the taxable gain or 28% if you exceeded the basic income tax band.
Non-residential property tends to cover assets such as plots of land, shops, factories and offices, i.e. properties where you would not normally reside. If the sale was carried out in a personal capacity, you could offset gains against your capital gains tax allowance. Any gain which exceeds this amount would be added to your taxable income. If this were within the basic income tax band, you would pay a flat 10% on the taxable gain, rising to 20% for those above the basic income tax band.
Non-resident, sale of UK residential property
The subject of non-residents and capital gains tax has prompted many controversial headlines over the years. Under the current tax system, non-residents won’t pay capital gains tax on most of their UK assets, such as shares. However, they are required to pay capital gains tax on property and land gains in the UK. If the property/land was held before 6 April 2015, the individual has the option to rebase the value to 5 April 2015.
Typically, a non-resident would be eligible for the standard capital gains tax allowance. Chargeable gains over the annual allowance are added to the individual’s taxable income. Combined income exceeding the basic income tax band would see the gains charged at 28%; those below the limit are charged at 18%. Any disposal must be reported to HMRC within 60 days of completion, regardless of any gain/loss, via the capital gains tax on UK property service.
Non-resident, UK non-residential property sales post-April 2019
In April 2019, the UK government extended the scope of capital gains tax to include all UK real estate and land, not just residential. We also saw new regulations covering what were deemed indirect property sales. This covers the sale of shares in property-rich companies which derive at least 75% of their value from UK land/ property (not trading assets). This subject is covered in more detail in the corporate section below.
Simplified tax rates for UK residents
As a UK resident, if you have a chargeable gain on a residential property, this would be added to your taxable income (less your capital gains tax allowance). If your combined taxable income does not exceed the basic rate tax band, you will be charged 18% on the gain. If the combined taxable income takes you above the basic rate tax band, you would be charged 28%. The rate for commercial property gains is less, at 10% and 20% respectively for the individual tax bands.
The situation regarding property tax is different again when transactions are carried out by corporate bodies. While less complex than taxation on personal property investment, it is vital to be aware of your obligations.
Limited company sale of residential property
Many investors have used limited companies to hold their buy to let assets in the private rental sector. In this situation, where the trading of properties is supplementary to the main business, gains on a property sale would be subject to corporation tax. This rate is currently 19% but is subject to change.
Company shares held by a non-resident taxpayer
In the past, some non-resident taxpayers in the UK have used corporate entities such as limited companies to shield property gains from capital gains tax. However, as we covered above, this has changed due to new legislation introduced in 2019. As a result, if a non-resident taxpayer owned at least 25% of shares in a property-rich company, deriving at least 75% of its value from non-trading UK property and land, any disposal would be considered an indirect property sale. While normally share sales for non-residents are free of capital gains tax, in this scenario any gains would be charged at a flat rate of 28%.
Usually, chargeable gains on property disposals would be added to your income, with rates of 18% for those who do not exceed the basic rate tax band and 28% for those who go above. However, the situation is different if an individual is deemed a property trader/developer. Unable to use the standard capital gains tax allowance, profits on property sales are classed as trading income. Consequently, for an additional rate taxpayer, this would mean a charge of 45%, a 17% increase on the usual capital gains tax rate!
As individuals and companies become more innovative in the structure of property investments, HMRC has introduced an array of new regulations. This has resulted in a range of capital gains tax rates on property, ranging from 0% to 45%. Recently, there has been much focus on non-resident investors and, in particular, treatment of both direct and indirect property gains. It is safe to say this is a fluid situation!