(please note that this article originally appeared on adamfayed.com).
Article updated on January 17, 2021
Property tax in the UK – what will you need to pay in 2021. That will be the topic of today’s article.
I will speak from the perspective of both British expats living overseas and non-British people living in the UK.
The article will also answer some commonly asked questions about property investments more generally, such as is now a good time to invest?
If you have any questions and/or are interested in property investments, you can email me (advice@adamfayed.com), use the WhatsApp function or this contact me page.
Please be aware that taxes are always changing when it comes to property. This article is merely true at the time of writing and it is always sensible to get professional tax advice.
I will try to update this article, as much as possible, when rules change in the future.
In one of the the latest update made during April 2020, I updated the article slightly due to the ongoing economic and healthcare crisis which has affected the world.
In the years ahead, we can expect increased taxes on property in the UK, due to the huge hole in government finances caused by the pandemic.
Capital Gains Taxes for UK Expats living overseas.
Capital Gains is the tax which you pay once you dispose of the asset – selling the house in this case.
The total value is made by taking the purchase property of the home, and working out how much gains has made been.
For example, if your property cost 200,000GBP and you sell it for 300,000GBP, the tax is usually charged on the 100,000GBP capital gains.
The capital gain threshold is complicated, however. For residential property it is charged at 28%, assuming the total taxable gains and income are above the income tax basic rate band.
However, below that limit, the rate is 18% for trustees. For non-residential property, for example office buildings, and other assets, the rates are 10% and 20% for individual taxpayers.
New updated capital gains tax rules from 2015
There used to be a loophole in UK law, which allowed non-residents not to pay UK capital gains taxes.
However, since 2015, the rules changed. Those rules affect buy-to-let landlords the most.
So the capital gains rate can be as high as 28% for expats.
Does leaving the UK and dumping the assets stop capital gains taxes?
Many years ago, expats who simply leave the UK for a complete tax year, could reduce their tax burden.
The rules have now changed. These days, you need to be nonresident for a minimum of five UK tax years to take advantage of these rules.
In effect, even though you are deemed non-resident for income tax purposes, you are considered a temporarily non-resident for capital gains tax purposes for up to five complete tax years.
What are some of the capital gains reliefs?
A lot of the reliefs are for businesses. For example:
- Business incorporation relief – Available when you transfer your assets into a PLC company. However, due to the costs involved, this option is better for larger landlords that have big portfolios of properties. For smaller landlords, this isn’t the best option, due to the costs involved.
- Holdover gift relief – on some gifts related to business assets, or gifts made into trusts, can result in taxes not being payable until the person gets rid of the asset
- Entrepreneurs relief on property – which can reduce the taxes down to 10% when disposing of all or parts of a business
There are many considerations and these rules usually change on a yearly basis.
How about capital losses?
Capital losses made on a chargeable transaction can be netted off against the capital gains made in the same tax year.
How about some other exceptions on capital gains?
Other exceptions on taxes include:
- Your primary residence. Your primary residency is usually not taxed as heavily as buy-to-let properties.
- Transfers of assets between legally married people,
What are the penalties for failing to report capital gains taxes?
If you fail to make a capital gains declaration to HMRC within 30 days, you can face penalties – even if no capital gains is due.
What are the other taxes apart from capital gains?
The main taxes on property are:
- Stamp duty
Assuming you don’t have any other property in the UK, the rates are:
- Property price of less than £125,000 = 0%
- property price between £125,001 and £250,000 = 2%
- property price between £250,001 and £925,0000 = 5%
- property price between £925,001 £1,500,000 = 10%
- Property price over £1,500,000 = 12%
Remember though, that you only pay on the amount above the threshold. For example, if your house costs £300,000, you wouldn’t pay 5% on the whole amount.
You would pay 5% on the £50,000 above the threshold and 2% on the £125,000, between £125,001 and £250,000.
In addition to these bands, from 2016, the UK Government announced new bands for buy-to-let landlords.
This means buy-to-let landlords will pay an addition 3% over the threshold.
These rates are:
- Real estate under £40,000 = 0%
- Real estate between £0 and £125,000 – 3% assuming the property isn’t worth less than 40k
- Real estate between £125,000 and £250,000 = 5%
- Real estate between £250,000 and £925,0000 = 8%
- Real estate between £925,000 and £1,500,000 = 13%
- Real estate over £1,500,000 = 15%
This tax is impossible to completely avoid in most cases. This is because any individual buying or receiving a residential property is subject to the tax. So even non-residents expats, pay the rates.
In some cases you can transfer a property’s deeds as a gift or in a will. This type of estate planning can reduce the taxes in some situations.
2. Income tax
Even though your main income from work or a business isn’t usually subject to UK taxes, assuming you are an expat, you do have to pay income taxes on rent from properties.
The current rates are:
0-11,850= 0% tax
11,851 – 46,350 = 20% tax 46,351 – 150,000 = 40% tax Over 150,000 = 45% tax
So if you have 1-2 smaller properties, with minimal rental income, you are less likely to pay income tax.
You do, however, need to fie taxes in the UK on your rental properties.
There are also ways to reduce the tax rates, including deducting costs including mortgage interest before calculating the net profits.
Other deductions include maintenance costs, property agent fees, insurance premiums and council tax if applicable.
However, that is about to change. From April 2020, the tax on financial costs will be restricted to the 20% basic rate taxpayers.
So landlords with more expensive houses are likely to suffer, as a result of the changes.
3. The annual tax on enveloped dwellings
This tax came in, in effect, trying to make it less tax-efficient to hold high-value UK residential property through a company, rather than individual name.
Like the other taxes, it increases progressively. What is different about this tax, is that it charged as a flat, rather than percentage, fee.
Starting out at a £3,650 annual charge for proeprties worth 500,000-1m, it reaches £232,350 for properties worth more than 20million.
4. Inheritance tax
I have previously written about domicile vs residency. Just because you are resident outside the UK, domicile is harder to change.
HMRC usually deems you domiciled in the UK, if:
- You were raised in the UK and you retain property in the UK
- If your parents considered the UK their permanent home when you were born
So your worldwide estate can be considered taxable by HMRC, if you meet these criteria and your assets are worth more than £325,000 when you die.
Your heirs might have to pay 40% on amounts greater than £325,000 no matter where you are in the world.
There are ways to reduce your tax liability, including if you give money to charity.
From 2017 the transferable main residence allowance came in. This takes into consideration your main residence. So you can leave up to £500,000 tax free, or £1m for a couple.
Frequently asked questions
This section will cover some frequently asked questions (FAQs)
How about council tax?
This is payable by the tenant but of course, if your property is empty, you as the landlord need to pay.
Council tax depends on where you live in the country – different councils tax at different rates.
How about expat mortgages?
Expat mortgages have gotten progressively harder to get, at a good rate. Some decent providers do still accept British expats though, and I can put clients in contact with them.
In the video blow I explain how easy it is to get expat mortgages:
How about ISAs and other tax-efficient investments?
ISAs are available to UK residents, regardless of whether you are British or an expat living in the UK.
For British expats, ISAs are not available. Investing fresh money into ISAs isn’t the best investment option if you are going to be moving overseas soon.
I explain more here:
How about for non-domiciled foreign national, or expat, living in the UK?
This article has mainly considered UK expats living overseas, but hasn’t focused as much as non-doms and expats living in the UK.
Most non-doms living in the UK, are foreign-nationals, but can still get a favorable tax regime (although less favorable than before) in return for paying some fees.
For most non-doms, you will be considered tax resident in the UK. Your domicile will depend on your country of birth.
As a UK resident non-domiciled person you have the option of being taxed on an arising basis and remittance basis.
The remittance basis taxes you only on your UK income and gains and only foreign income and gains you bring back to the UK.
You are then charged for this status. This charge is £30,000 if you have been resident for seven out of the last nine years. It goes up progressively to £90,000 if you have been resident for 17 out of the last twenty years.
In comparison, the arising basis, means you need to pay tax on your worldwide income and gains when it arises.
So how much capital gains, income tax and other taxes you need to pay on your UK property depends on which kind of non-dom you are and several other things.
For UK expats who aren’t non does, the tax situation is usually simpler. Unless you are American or a few other countries with complex tax regimes, you are usually taxes at the same rates as British residents and not double taxed by your country of origin.
Are these taxes likely to become more severe?
Regardless of which political party is in power, taxes and admin on property in the UK, seems to get progressively more difficult.
Nobody knows what the future will hold, but I doubt it will become easier to own property as an expat.
How about double taxation for expats on property income and double tax treaties?
If a person chooses to move from any of the countries belonging to Europe, they are protected from double taxation by the Double Tax Treaty (the treaties between European countries and the United Kingdom).
Many other countries of the world which are not European countries have tax treaties with the United Kingdom in order to avoid double taxation. such countries are Canada, China, India, Japan, and the United States of America.
It is better to check if your country has such a treaty with the UK.
What are some of the other challenges about buying property?
In some countries such as China and South Africa, there is the additional issue of sending money out of the country in a cost-efficient way.
Beyond that, it is now much harder to get 100% or even 95% mortgages, in the UK, compared to pre-2008.
Even though 100% mortgages got a bad name during the financial crisis, they had the advantage of using leverage to your advantage.
Now you need to put down a 30,000, 50,000 or even 100,000+GBP deposit. As property capital appreciation is usually much less than stock markets, this is an indirect loss.
For example, if you would have put that same 100,000GBP into the US stock market (the S&P500) one year ago, it would be worth 130,000GBP now. 10 years ago, that same 100,000GBP would have been worth over 300,000GBP, if invested in the same market.
That might be an extreme example because we are coming off from a great decade in markets.
In general, however, you should want to put down as little money as possible on day 1 and invest the rest into global markets for the long-term. That is assuming the mortgage is affordable of course.
Additionally, you often need to find a professional firm to look after your property and find tenants.
Many professional property management firms exist in the UK, of course, but they don’t come for free, typically charging over 1% per year (and much more in some cases) for their services.
This fee will further reduce your net returns.
Is the UK property market due for a rebound?
It is a misconception that the UK property market as a whole has had a great time of late.
In fact, real UK house prices, are still lower than in 2007-2009, across the country, with the exception of London and a few other areas.
Nobody knows what the future will hold. It does appear that the Midlands and the North, are due for an increase in property prices, relative to London and the South East.
Is Brexit likely to affect UK property prices?
Nobody knows. Brexit has thus far had a far bigger impact on London and the luxury end of the market, as more expats in the UK have been recalled to Paris, Frankfurt and beyond.
Parts of the UK which are less dependent on global trade, haven’t been affected, with recent strong performances in the North.
Nobody knows what the future will hold for the UK’s economy though, and the North’s property performance will be partly related to HS2 and other government infrastructure projects.
After the General Election and Brexit have bought some certainly back to investors, it does appear the UK property market is stabilising, with prices rising at their fastest level in 14 months in January 2020.
The rises do mask some regional differences, with Edinburgh gaining by 6.1% year on year and London by just 1.9% .
What are the biggest mistakes property investors make?
Probably the biggest mistake I have seen is only considering the property capital appreciation or depreciation.
Property is in many ways more like running your own business, than a pure investment, and HMRC and many other tax authorities consider it so.
In other words, you have revenues and costs, and your total returns are highly dependent on rental yields.
They are also dependent on using leverage from the mortgage. Even though debt has its risks, it can improve returns.
Will the ongoing global health and economic crisis affect UK property?
Of course property markets are more likely to be affected than liquid assets for some obvious reasons; property is often funded on debt (mortgages) and relies on the face-to-face economy.
So property is unlike something like stock markets, where you can just increase your exposure, if markets are down. In effect you can see falling stock markets as an opportunity.
With property, it could be seen as an opportunity if house prices fall, assuming that you are cash rich.
As this virus could last, indirectly, for a while, it could make sense to delay any debt-related purchase.
Does investing in emerging market property make sense, rather than the UK?
It can do make sense but remember that valuations are now high in countless emerging markets, with the exception of certain parts of Eastern Europe and Central America.
You also have the additional risks of countless cultural and legal differences, that you might have not factored in, when buying property overseas.
For example, in China and many Asian countries, people don’t like “second hand houses” unlike Brits that typically like to view a house before purchase.
This is one reason why UK off-plan property sells so well in China, Singapore and Hong Kong. This cultural norm, however, makes it harder to sell your property, if you buy in some of these markets.
I have lost count of the number of expats that have believed that they are sitting on a huge profit, only to discover that they can’t sell their house or land in Cambodia, China, Indonesia and countless other countries.
One example which sticks in my head, is an associate of mine, who boasted to me about his 200%-300% returns in Indonesian property and Cambodian land, over a five year time horizon.
He discovered many years later that he couldn’t sell the plots easily, and is currently considering just using them as passive income instruments through rent.
What’s your main service areas?
Property and tax is not my service area – but tax-efficient investments are, starting from $75,000 (50,000GBP) on the lump sum side, and $750 a month for monthly investors.
I do also help with second residency services. In some cases, this can be done through property investments as explained in this article.
It is also possible to get second residencies in some countries through investments and fixed deposits into bank accounts.
Conclusion
UK property is increasingly getting taxed more heavily. Many of the tax advantages, for non-residents and UK expats, have been closed.
It is, therefore, increasing difficult to invest in UK property in a tax-efficient way, especially for smaller landlords.
As tax on property is a complicated subject, which often changes on a yearly basis after every UK budget, proper professional tax advice is often needed.
As opposed to financial investments for expats, property is a much more complicated topic. This complexity can result in some unexpected tax bills.
For expats with bigger estates that can be liable for huge inheritance taxes, regardless of their residency, it makes sense to have a review of your investment situation to reduce the bills for your heirs.
For all of the faults of UK property, it still is a safer way to invest than emerging market property and land.
Further reading
My answers on Quora.com have received over 222.2 million answer views over the last few years, making me the most viewed author globally on financial matters on the social media website.
In the answers below, I discuss:
- What is my favourite stock strategy and why?
- How common are “rags to riches stories”, and how should we define riches anyway?
- Should people invest in one go, as a lump sum, or monthly invest?
- Do people really sacrifice their health for wealth?
Below is a preview of the article
We are on the second day of 2021. This time last year, few had heard of the coronavirus, let alone lockdowns.
By late February and March, there was panic in the stock markets and panic buying in the supermarkets:
People were saying what they always say……this time is different! It was said in the 1930s, when Hitler was rising to power, WW2 was occurring, 9/11 happened and 2008–2009 was in the headlines.
I am sure it will happen during the next crisis too. Anyway, what happened during 2020?
- US Stock markets were up over 17% in general, with the Nasdaq outperforming, up 43%, the highest for 11 years
- Many European markets which haven’t done particular well recently, like the Danish or Finnish market, did very well.
- Underperforming Asian markets like the Taiwanese, Chinese and South Korean markets did well. Stocks in South Korea were up 37% on average – making it the best performing market of the year.
- The worst performing markets were in places like Brazil and the UK.
- Tesla was up 700%, with some other stocks up by over 1000%.
- The Nasdaq doubled from the worst of the crisis in early March, with most major indexes up 60%-90% on March.
- The Japanese stock market, the Nikkei, also performed well.
- Short-term government bonds outperformed gold, silver and pretty much every other asset in the brief period where markets were panicking.
- The best time for stock markets was in early-mid November, despite a disputed US election and a second European lockdown. People forget that now. They assume markets soared as the vaccine was discovered in November. They did increase after that, but they were rising in November in any case. So just like in 2016 when people were amazed that markets soared after Trump’s victory, people were taken by surprise by skyrocketing markets in the face of a US election result which was unclear for days.
I don’t know anybody who managed to predict even half of these trends. I do know some sensible people who said things like “don’t panic” and “nobody can predict the near-term future”.
I said it many times in 2020 and for years beforehand. So much so, that most of my followers know the advice in advance.
So my favourite stock market strategies are quite boring. They are:
- Be diversified. Every dog has its day. The South Korean stock market had its day in 2020, as did the Nasdaq and some others. Over time, that will change. The UK and Japanese markets might outperform this year or in 2022, as an example.
- Buy and hold long-term.
- Buy the whole market through ETFs and keep individual picks down to 10% at most. Purchase both stocks and bonds, so I can rebalance if a crash happens, and manage risk.
- Reinvest dividends
- Don’t be put off if an investment isn’t doing well for a few years, or get too excited by short-term performance.
- Never speculate.
If you do that, you can beat 90%+ of people long-term.
