This article will look at the taxes involved when buying or selling a property and hopefully answer any question you have about the process
The property market is a veritable minefield of costs and expenditures, and when tax bills are added as well, it can drive a person to tears. But although tax is inescapable in one form or another, there are professionals at hand to advise you how to reduce it to more palatable levels; they are the Tax and Trust Specialists.
The area of property taxation is a highly specialised one, and this article is not a complete guide to taxes and trusts. Instead it provides a general assessment of what you may be liable to pay in tax on your property, and how specialists can help you, in order to start you off in the right direction.
What Taxes are involved?
The taxes you can expect to encounter when buying and selling property affect everyone:
Buying your home
1) Stamp Duty Land Tax: Previously known as Stamp Duty, is an amount you will have to pay if you buy a property worth £125,000 and over. The percentage you will have to pay increases, depending on which bracket your property falls into:
Purchase Price of Residential Property Rate of Stamp Duty Land Tax (% of Purchase Price)
- £0 - £125,000: 0%
- £125,001 - £250,000: 2%
- £250,001 - £925,000: 5%
- £925,001 - £1.5 million: 10%
- Over £1.5 million: 12%
Selling your home
1) Capital Gains Tax: This tax is only applicable to you if you own a second home. The thinking is that you have bought more assets with the intention of making a profit, and therefore any gains you do make on a property investment should be taxed, when that property is sold.
Similarly to other forms of tax, the amount of CGT you pay depends on your overall income. At the end of the tax year, any gains you made are added to your taxable income. You do have some allowances called the Annual Exempt Amount, which amounts to £11,300. If it's a trust, it's £5650 instead.
The rates if you pay Higher Rate Income Tax are as follows:
- 28% on gains from residential property
- 20% on gains from other chargeable assets
If you pay Basic Rate Income Tax, then the rates are slightly different:
- Work out your total taxable income (minus any Person Allowances etc), and then your total taxable gains (minus your tax-free allowance).
- Add the two figures together.
- You'll pay 10% if the amount is within the basic Income Tax band, but 18% if it's on residential property. Any amount that goes over this you will pay 20% (28% on residential).
2) Inheritance Tax: This is paid on your ‘estate’, which includes everything you own when you die, such as property, investments, and possessions. However, it does not apply to everyone. Your estate must initially be worth more than the £285,000 threshold for it to be taxed. However if your estate is left to your spouse or civil partner, then this tax does not apply, even if it is above this threshold.
It is possible to reduce all three of these types of tax with the help of a tax specialist
Another way of avoiding some tax charges is to put your assets into trusts, but this is a tricky path to navigate. Trusts have long been a loophole for the cost-conscious property investor, but professional advice is recommended.
What are Trusts?
Trusts are legal bonds within which property can be owned, as opposed to private ownership. They provide a way around some Capital Gains charges which may be incurred when the property is sold. So they are beneficial because assets are to some extent protected from tax, which means that when it comes to inheritance, more of your assets will go to your family.
Trusts can also be used for protecting assets from dependants, who may otherwise use your property in ways you would not want.
Trusts can therefore be highly useful in terms of keeping unwanted costs at bay. However they are complicated legal documents, and so if you think they could be of benefit to you, then consulting a professional is really the only way to go.
Your tax and trust advisor can keep you informed of all the latest changes in the law, ensuring you remain one step ahead.
Do I really need professional advice?
The whole area is quite complicated, and if you have a number of taxable assets then it is advisable to consult these professionals. In the long run they could save you money, and make sure you stay on the right side of the law.
If you do decide you need professional advice, some websites may be of some use:
- Unbiased will match you with specialists that meet your requirements in your area.
- Alternatively, Landlord Zone provides the names of some tax and trust specialists, with their contact details.
How much are they likely to cost?
The cost will vary depending on the tax firm or financial advisor you choose. Some will not charge for an initial meeting, but it is a good idea to find this out first. There will often be different payment arrangements, either hourly, flat fee, or based on commission, and you can expect hourly charges to generally be between a hundred and three hundred pounds an hour.
This advice is not cheap, but in the long run, they could save you more.
They’d better be useful…
Tax and financial advisers all specialise in different areas, and in this case you will be looking for specialists in Investment Trusts, Taxation Planning, and general Property Law and Tax. In the initial contact you have with them, whether it be by interview or over the phone, ensure that you tell them exactly what you want and ask them what services they can provide in order to help you best.
If they are unreliable about returning your phone calls or emails in the first instance, then look elsewhere, because you will need someone you can rely on.
You will also need to enquire as to the qualifications they hold. In this instance, it is essential that they have Incremental Tax qualifications, called ‘Taxation and Trusts G10’ from the Chartered Insurance Institute. Also look for the Advanced Financial Planning Certificate, (APFC), of which the Taxation and Trusts aspect is a compulsory and integral part.
What should I ask them?
Initial questions could be:
- What services do you provide?
- How much do you charge, and are there hidden costs? Are you paid hourly, by flat fee or commission?
- What experience do you have with people in my circumstances?
- How much money can you save me?
Let's ask the Professionals...
JOHN JEPPS LLP Institute of Tax Institute of Chartered Accountants Society of Trusts and Estate PractitionersWhat services do you offer?
- We are a specialist firm that deals with taxes, trusts and wills. We are available either directly to the client, or can be approached by a client’s lawyer to provide specialist advice.
- We tend to offer quotes in advance for work, depending on the complexity of the job in question. We don’t often charge hourly rates, but if we were to, the managers would charge around £120-£150 for their time, and partners would charge around £250. This is around average for the profession, as we must also cover costs of professional education, ensuring we stay ahead of developing legislation, to give the clients the best possible service.
- Of course this depends on their circumstances; but it is possible to save them the 40% CGT on their property or the 4% Stamp Duty: so potentially the savings are significant.