Property Charges and Taxes Explained

Purchasing or renting a property is not as simple as making your monthly payments on your mortgage or to your landlord. There are also a number of taxes and charges that you need to be able to account for financially upon finding a home; be it a house, maisonette, apartment or anything else. Being able to afford the monthly payments and everything else that comes with finding a new home is crucial for a number of reasons.

As in the case of any secured loan such as bridging finance, defaulting means the loss of the asset in question (a property in this case). However, in cases of a primary mortgage, unlike investment finance offerings such as auction finance where you may lose out on an investment, in the case of a home mortgage, keeping up with repayments is crucial to maintain a roof over yours and your family’s heads.

Defaulting on rent or mortgage payments can have hugely negative consequences for one’s credit rating and having your property repossessed in the case of missed mortgage payments can be extremely stressful, costly and all-encompassing. Understanding what is involved with each potential cost to consider and if and when you qualify for each is therefore of paramount importance.

Stamp Duty

Stamp duty, is a tax that is applied to the purchase of a property. Prior to the 2017 Autumn Budget, stamp duty was paid on all residential properties exceeding £125,000. Now, stamp duty is set to be abolished for first-time buyers who are purchasing a home that costs up to £300,000, saving first time buyers thousands of Pounds and helping them to get on the property ladder much easier.

Stamp duty is a progressive tax, which means that the amount paid will increase as the price of the property rises. If you are not a first-time buyer, you will have to pay stamp duty on all properties that are over £125,000.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax that is applied to any profit you make by selling any possessions or investments, or on the increase in their value from when you acquired them up to the date you give them away, hence this tax is particularly relevant and important for properties as one of the highest value assets one can buy or sell. Furthermore, many investors improve the value of their property and then sell it purely for profit-purposes, making this tax particularly pertinent.

Typical Assets to Pay CGT on Include:

  • Properties (second or more);
  • Sale of expensive valuables (art, jewellery, etc.);
  • Stocks and Shares;
  • Sale of a business.

The tax is only due when you ‘dispose’ of the asset in question; either by selling or passing it on. The asset must also have gained you a certain amount of profit in order for you to be taxed on them. The amount of tax you ultimately pay however, largely depends on the tax band you fall into. The amount of capital gains you can make each year that are tax-free is called your ‘capital gains allowance’ or ‘CGT allowance.’

What are the 2017 – 18 Capital Gains Tax Rates?

Capital gains on non-property investments are as follows for the 2017/18 tax year:

  • 10% for basic-rate taxpayers
  • 20% for higher-rate taxpayers and additional-rate taxpayers

Capital gains on second homes or buy-to-let investments for 2017/18 are as follows:

  • 18% basic-rate taxpayers
  • 28% higher-rate and additional-rate taxpayers

What if My Capital Gains Push Me into a Higher Rate Tax Bracket?

If you are a basic-rate taxpayer according to your regular income, but your capital gains push your overall earnings into the next tax bracket, then you will only pay the higher rate of CGT on the amount that takes you over the threshold.

How do I Pay Capital Gains Tax?

You are required to declare your capital gains on your tax return, or to report them in the Report Capital Gains Tax online governmental service.

Tax-Free Gains Can Include:

  • Gifts between married couples or civil partners;
  • Charitable gifts;
  • The sale of your only or main home;
  • The sale of possessions worth no more than £6,000;
  • Premium bonds;
  • Specific investment schemes;
  • Betting, pools and lottery winnings;
  • ISAs or Peps
  • Proceeds from life insurance policies

Council Tax

As part of the community in a local council area, you are required to pay council tax and this is one of the most common taxes that homeowners and tenants alike are required to pay, usually on a quarterly or annual basis. Council tax rates are set by the property’s Local Authority [council] and prices m ay therefore fluctuate from year to year, even month to month to an extent.

What Does Council Tax Pay For?

Council tax payments go towards paying for the following local services:

  • Fire services;
  • Police services;
  • Education;
  • Rubbish collection;
  • Recycling collection;
  • Funding libraries;
  • Road maintenance;

Who is Responsible for Paying Council Tax?

Generally, it is the person living in a property who is responsible for paying its council tax. There is a ‘hierarchy of liability’ with regards to who must pay council tax.

  1. A resident freeholder;
  2. A resident leaseholder;
  3. A resident statutory or secure tenant;
  4. A resident licensee.
  5. Someone who lives in the property with no security of tenure
  6. The owner of the property.

The keyword here is ‘resident’ as a tenant, you will have a landlord but they are unlikely to be the resident of the property. Hence, as the resident tenant, the responsibility is with you to pay council tax.

How Much Does Council Tax Cost?

The amount of council tax that you must pay is decided by your local council. For this reason, some areas will have higher or lower council tax rates than others and, as such, their provisions will differ.

All homes are given a council tax valuation band by the Valuation Office Agency (VOA), which is based on the value of your home on 1 April 1991. The amount of council tax you pay will depend on the band your property sits in. The local council sets the value for each band every year.

Valuation band Range of values
A Up to £40,000
B Over £40,000 and up to £52,000
C Over £52,000 and up to £68,000
D Over £68,000 and up to £88,000
E Over £88,000 and up to £120,000
F Over £120,000 and up to £160,000
G Over £160,000 and up to £320,000
H Over £320,000

Who is Eligible for a Discount on Council Tax?

If there is only one adult living in a property, they will receive a 25% discount on their council tax bill. However, one does not actually have to live alone to be eligible for this discount and may live with people who are not counted on the council tax bill. These people are known as ‘disregarded people.’

You may be disregarded if you are:

  • 17 years old or under
  • A prisoner or mental health sufferer awaiting detention;
  • A live-in care worker
  • A young person on a government training scheme or apprenticeship
  • A long-term hospital patient or care home resident;
  • A full-time student or PhD fellow
  • A ‘severely mentally impaired’ person
  • A person living in a bail or probation hostel
  • Aged 18 and someone is entitled to Child Benefit for you
  • A member of a visiting armed force