Why should I care which council Tax band I’m in?

Council tax applies to home owners’ and renters’ because they’re usually the people that have to pay the tax.

Council tax can ultimately play part in a decisive factor, in whether someone is going to buy a property or rent a property. If the council tax seems to be financially unsuitable, it can break a deal. Consequently, it’s important to know which council tax band a property is in, and know how much it will cost.

The amount you pay depends upon the area in which you live and the band of your property. To find how much each band has to pay in your area, visit your local council’s website.

Council tax banding

Your council tax banding is dependent on the value of the property- it’s banded by a letter, from A to H. A being the least expensive, and H being the most expensive. Obviously, the higher the value of the property, the higher the council tax band.

Finding out which council tax band I’m In?

The band of every house in England, Wales & Scotland is public info via the following websites:

• In England and Wales use the Valuation Office Agency (VOA)
• In Scotland use the Scottish Assessors Association (SAA)
• You could always ask your neighbours and see if they know.

Know of a better way to find out the band? Let me know!

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In principle, I always recommend getting a good accountant that has had plenty of experience with property sales, so he/she can calculate the best options for you financially. The tax guides on property Investment Project are simply here to make you aware of your options, and nothing more. I’m far from a tax guru when it comes to property; there are specialists out there that can explain the fundamentals better 10 fold.

Tax Treatment

Broadly speaking, there are two options as an individual that your actions of selling property can be classed under by Inland Revenue, it’s either a “capital transaction” or a “trading transaction”

Property Trader

If the intention in purchasing the property was to develop and sell the property with the intention of making a profit, the Revenue would be likely class you as a property trader. A property trader would be subject to income tax on any profit.

Capital Transactions

Capital transactions are usually retained for property investments, eg an individual purchasing a property to rent out. The disposal of a property investment would be subject to capital gains tax (‘CGT’) on any gain arising.

Capital Transaction Or Property Trader?

In some circumstances trader treatment can be beneficial, particularly as it allows for a greater offset of expenses, for example any maintence work or extentions can be used against profit. Whether the Revenue would agree that this is a capital transaction will depend on a number of issues:

• Whether you have undertaken this kind of activity before
• How long the property will be held before selling
• Will the properties will be rented out
• Whether you anticipate doing this again

If the Revenue class your action as capital transaction, this would allow you to take advantage of the various CGT reliefs such as taper relief, annual exemption, principal private residence (‘PPR’ relief) etc and therefore for most people this will be the most attractive treatment.

A key issue would be how you treated the property after development. If you were to sell a property within 12-24 months, there would be a good argument that income tax treatment would apply because you will be seen as a trader for selling quickly after purchasing. There would then be fewer reliefs, and no benefit would be obtained from living in the property as you couldn’t claim PPR relief. In order to rebut any such argument, you would need to persuade the Revenue that the property was purchased with the intention of living in it, or getting tenants, but due to unforeseen circumstances, such as personal/financial issues, your plans changed and you were forced into selling the property.

If you were to lease the property for a number of years after development, or if this was an isolated activity you would have a good argument that the property was not purchased/developed solely to resell at a profit, and CGT should be applied.

If you were classed as a property trader, you would also need to consider any national insurance charge which is set at 8% on profits within the upper national insurance charge limit and 1% above this. There could also be a liability to national insurance charge on the profits if you were classed as a trader.

First Time Buyers Should Argue For Capital Treatment

For most people that are just starting off it would be advisable to argue for capital treatment, assuming you have some grounds to support your stance. The gain would be calculated as the disposal proceeds less the costs of acquisition/development and enhancement (eg refurbishment expenditure). You would be allowed a deduction for the incidental costs of acquisition and disposal (eg stamp duty, estate agents fees, conveyancing fees). You would then obtain the benefit of the annual exemption on disposal, and taper relief.

You could also consider occupying the property and claiming PPR relief. This is very advantageous and 12 months occupation could eliminate three years worth of the gain. If the property was clearly purchased, developed and then immediately sold none of these reliefs would be available.

Related posts:

Sell A Property And Benefit From Taper Relief
Using A Property Company To Save On Tax
Tax On Selling Property

From the 6th of April 2008 Taper relief will be abolished. Chancellor Alastair Darling announced that taper relief will be abolished, and will be replaced by a flat 18% tax rate.

Following the abolition of taper relief, when any such loan notes are redeemed or otherwise disposed of after April 5, no taper relief will be available on those disposals.

If you plan on selling a property anytime soon, might be worth selling before the 6th of April 2008, to avoid the new flat rate.

What is Taper Relief?

Essentially, taper relief is a relief from Capital Gains Tax (CGT). The relief was introduced with effect from 6 April 1998. The basic premise for tapered relief is to reduce the capital gains tax that an individual must pay when they dispose of an asset. Its purpose is similar to indexation, in that it aims to reduce the amount of capital gains tax you have to pay when selling property.

Who can Benefit from Taper Relief?

The relief is available to individuals, trustees and personal representatives. However, taper relief cannot be claimed by companies; consequently, anyone that has a property related company cannot take advantage of this relief.

Primary residences are exempt from capital gains tax but profit made on most second properties, such as buy-to-let, are taxable.

Qualifying Holding Period

If you purchased a property before the 6th of April 1998, the holding period for taper relief will only account from the moment after the date of introduction. For example, if you bought a property on 6th April 1997 and sold it in 6th April 2007, you will only be liable to claim 9 years taper relief.

How is Taper Relief calculated?

The longer you hold assets the more taper relief you get. For example, if you sell a property after three years, you qualify for the minimum of 5% taper relief, whereas if you hold a property for ten years or more you qualify for the maximum of 40% taper relief.

Example
Robert buys a property for £100,000 and sells it after ten years for £300,000. Ignoring various costs his capital gain is £200,000. His taper relief is 40% of this amount: £80,000. In other words, he does not have to pay any capital gains tax on £80,000 worth of profit.

Factors that can affect the length of holding period

• where an inter-spouse transfer is involved, the holding period is the combined ownership period of both spouses (note that this may be extended to registered civil partners)
• where a no gain/no loss event has taken place (eg gains held over on making gifts, or gains rolled into shares onincorporation) the holding period is based on the new owner’s ownership period or the holding period of the new asset
• gains deferred by reducing the cost of a replacement asset through roll-over relief only get taper relief by reference to the length of ownership of the replacement asset
• where a gain on a disposal is deferred to a later occasion through reinvestment, for example into an Enterprise Investment Scheme, the taper will operate by reference to the holding period of the asset on which the deferred gain arose.

Final note

• Taper relief is extremely beneficial for long term property investors. Short term investors (i.e investors that flip property) may find it more beneficial in terms of tax relief to hold properties under a company- more details in this article, Using A Property Company To Save On Tax.
• The taper relief rules are potentially complex, and professional advice should be sought in appropriate cases.

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There are many reliefs and deductions you can claim and there is plenty of scope for constructive capital gains tax planning. However, a personal favourite option of mine is to use a company to hold the properties. Consequently, you could end up with as much as 47% more profit after a few years.

So what exactly am I suggesting? Start up your own company and get the company to hold the properties to take advantage of cooperation tax and dividends, amongst other benefits.

Advantage of Using a Company to Invest in Property

The main reason to use a company to invest in property is the benefit of taking advantage of corporation tax rates and dividend tax rates, which are substantially lower than income tax and capital gains tax rates.

- Transferring Ownership
If for example you want to gift a property to your son, then this will incur a capital gains tax liability if held outside the company. However, if you have the property inside a limited company, your son can subscribe for some shares.

If this is done then the ownership can pass to your son tax-free, as the value of the transfer can be held over for capital gains tax purposes.

- The First £10,000 of profit is tax free
The first £10,000 of profit a limited company makes is free of tax!

This means that if you make £9,000 net profit on your rental income, then as a higher rate taxpayer you would pay £3,600 to the Inland Revenue in tax. As a company there is no tax liability.

- Lower Tax Rates
As a higher rate taxpayer, you pay 40% on your profit and gains. For a limited company, the tax rates are between 0% and 30%, a considerable saving!

- Dividends
A limited company can pay out profits in the form of dividends to shareholders, which attract under present legislation no National Insurance Contributions. You can use this to determine the income you receive in a particular year. So some years you may take money and some years you may not. You only pay tax on the amounts you take. As an individual you are taxed on all your income whether you want it or not!

Although, dividends is still taxable; the rates are still lower than capital net gains IF you plan on selling the property under 10 years of ownership. Here’s a good article on dividends tax explained. I say under 10 years because a personal owner of a property can take advantage of taper relief after 10 years of home ownership while companies cannot.

The rate at which dividends tax is payable depends on the amount of a company’s profits for the financial year in question.

Base rate of corperation tax is 30%, but there’s a reduced rate for small companies. Coroperation tax rates:

* For companies with ring fence profits the small companies’ rate of tax on those profits remains at 19% and the MSCR fraction 11/400 for financial year 2007 starting 1 April 2007. Ring fence profits mean the income and gains from oil extraction activities or oil rights in the UK and UK Continental Shelf.

The main rate of corporation tax applies when profits (including ring fence profits) are at a rate exceeding £1,500,000, or where there is no claim to another rate, or where another rate does not apply.

Now compare those to income tax:

Ultimately, what is left remaining, if any, after taking your dividends, the remainign profit will be liable for cooperation. Corperation tax is the tax that the company pays on its profits and dividends are monies taken out of profits that are paid to shareholders. How you decide to extract profits depend on how much you earn, and how much profit your company makes, how many expenses you have- that’s where a good accountant is handy. However, if your annual income is below 34.6k, it makes a lot of sense to pay yourself dividends to bring you up to the line, and declare the rest as company profit and pay cooperation tax on the remaining.

- Property Development Profits
Property development is a trade. Using a limited company will help you keep much more of the profit to use in the next development! If you’re receiving 100% profit from rental income (i.e you have no mortgage on the property), then the money you receive could go towards the deposit on another property under the name of the company (but the profit will still be liable for coroperation tax, unless you put the money down as a deposit before the end of the tax year). Otherwise, using the money as profit can be declared as dividends.

- Property Management Company
The use of a property management company can save considerable amounts of tax where it is not possible or desired to hold the properties within a limited company.

- Limited Liability
Imagine you buy a buy to let property, and your tenant has an accident, falling down the stairs of the property as one of the steps was not properly maintained. He successfully sues you and not only do you lose the property to pay for the settlement, but you have to sell your own residence as well! This can be avoided by owning the property in the limited company, where the company has LIMITED LIABILITY!

Disadvantages of Using a Company to Invest in Property

The company itself would be charged to corporation tax on the gain arising, and in addition, as already explained, you would be charged to income tax on the receipt of the dividend if you extract the remaining proceeds from the company.

If you are planning to occupy the property as a main residence, then using a company would not be beneficial. The company would not be able to claim PPR (principal private residence) relief on a future disposal. Additionally, you would be charged to UK income tax on a benefit in kind arising from the provision of accommodation by the company (unless you paid the company a market rental).

Companies are exempted from taper relief.

Who should consider using a company to save tax?

The decision as to whether a company should be used to hold the new investment property will essentially depend on your future intentions.

If you are more concerned about minimising taxes on any ongoing rental income the company may be the most tax efficient option, particularly if the profits are retained within the company for the purchase of additional properties. The company rate of tax (20%) would be much less than the higher rate of income tax the owners would suffer (if higher rate taxpayers). If profits were extracted the additional income tax payable on receipt would eliminate much of the benefit, but if the profits were retained in the company there would be no additional taxes. This is the real advantage of using a company.

In summary, where possible capital treatment should usually be aimed for those wanting to minimise the tax payable. If a significant gain is expected to be made when selling the property, particularly for long-term investment properties, then personal ownership is usually preferred.

Is it Easy to Start a Company?

Starting and running a company in the UK is cheap and easy. It costs about £100 to set one up and to have a set of annual accounts produced can end up costing no more than £500. That’s a relatively good investment considering you stand to save thousands with the benefit of cooperation tax.

Final note

In all cases you need to compare dividend tax to capital gains to corperation, to work out which will benefit most. In my personal case, I plan on keeping my properties for over 10 years, so I’m going to benefit from taper relief- I won’t need to start a company. But for those that don’t have a mortgage and receive rental income, it’s well worth starting a rental company. If you plan on selling property that you haven’t owned for more than 10years, it also might be worth starting a property company so you can benefit from coroperation tax rates or tax on dividends rates.

I would definitely suggest seeking advice from a well-experienced accountant, because they can calculate which options will benefit you most.

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Avoiding costs and expenditures when dealing with property is like trying to avoid bloodshed when going into battle with a hungry lion. Unfortunately, I imagine the pain of feeling an adult set of claws rip through flesh only to be a fragment of the pain felt when digesting the tax implications with property.

Anyone involved with property will feel the wrath of the taxman in one way or another. Although tax is inescapable, there are ways to significantly reduce costs. A financial specialist can give you a comprehensive guide on how to reduce tax payments to a more acceptable level (if there is such a level).

Selling your main home
If you’re selling a property that is your main home, you won’t be liable to make tax payments. However, there are certain conditions that must be complied with in order to make the cut:

• You personally purchased it.
• Any expenditure made on the property was primarily for the use of the home rather than with a view to make a profit.
• the property was your only home throughout the period you owned it (ignoring the last three years of ownership)
• you did actually use it as your home all the time that you owned it and, throughout that period, you did not use it for any purpose other than as a home for yourself, your family and no more than one lodger
• the garden and area of grounds sold with it does not exceed 5,000 square metres (about one and a quarter acres) including the site of the house

Tax on property that’s not your main home
This is when Capital Gains Tax (CGT) kicks in. Any profit you make from selling a property which is beyond your main home will be considered as “income”, consequently will be qualified for income tax.

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.

For up to date tax rates, go to the HM Revenue & Customs website.

What Expenses Can I Claim When I Sell a Property?
There are ways of reducing tax costs when selling property. I’m no expert, but for that, there are the Tax and Trust Specialists, as already mentioned. The area of property taxation is a highly specialised one. I’m sure the experts know all sorts of tricks, and dare I say “loopholes”

However, here are a few ways of reducing tax…

You can deduct your legal fees (for selling AND buying the property), the stamp duty you paid when you bought the property, estate agent’s commission and any other direct buying or selling costs.

If you have made ANY expenses on your property E.g extensions, new driveway etc. Provided that you can prove that you made those expenses, you can offset your expenses against your profit.

The difference between repairs (allowed as an income tax deduction) and improvements (allowed as a capital gains tax deduction) is an important one for any serious property investor.

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in this world nothing can be said to be certain, except death and taxes.

Never a truer word been spoken. For those blissfully unaware, landlords are required to pay tax on rental income. Anything landlords earn from letting property should taxed as regular income tax.

Letting residential property is considered a “business” (even if only one property is being let, and just like most businesses, there are plenty of ways to offset expenses to reduce the amount of payable tax.

Calculating your net profit

Whether you let one or multiple properties, you’re taxed on the overall net profit. You work this out by:

1] Add together all your rental income (for ALL properties you let)
2] add together all your expenses income e.g. mortgage (on the interest only), home insurance, maintenance (for ALL properties you let)
3] subtract your expenses away from your income

Please note, you can only use the INTEREST paid on a mortgage as an allowable expense, not the actual repayment. Also remember that you can only claim interest against a loan up to the value of the rented property when first let.

Reducing your taxable income

As mentioned, you can offset all your business expenses, to reduce the overall net profile, consequently paying less tax. For this reason, it’s best to save all your receipts and account for every single penny spent on your investment(s), even if it’s a small item like a pack of nails to put up picture frames.

You can total all your expenses for all your properties, to reduce your taxable income. If you let multiple properties, it is still seen as ONE business. So, if your expenses for one particular property is significantly less than another property you own, it means that you can offset a loss from one property against the profit from others. Your net profit counts as part of your overall taxable income.

If your taxable income from letting property is £15,000+ in a tax year you must declare it on the full Self Assessment tax return. If it’s under £15,000 you may be able to complete a shorter four-page return. If it’s under £2,500 your Tax Office may be able to collect any tax you owe through PAYE (Pay As You Earn) if you already pay tax this way.

For more information, I would recommend checking out the Direct Gov website.

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Stamp Duty costs for UK Houses:

Avoiding stamp duty

Yes, any property purchased for underr £175k is excluded from Stamp Duty Tax- an amount which is actually below the average price of a house in the UK. Trends show that homebuyers are extending their homes, not buying a bigger one, just so avoid paying a massive stamp duty bill.

It’s not actually legit, but it’s been known for some buyers to cut a deal with the sellers to help reduce, or even completely exclude Stamp Duty costs. For example, If a property is selling for £177k, then the buyer is liable to pay a 1% (£1770) Stamp Duty fee. However, the buyer could negotiate with the seller to make a public and legal sale of £170k, and then give the extra £7,300 (extra £300 tip) under the table. That way the buyer is excluded from Stamp Duty. Of course, the same theory applies with any property in any Stamp Duty percentile. As I said, it’s not legit, and I’m not encouraging such actions. I’m merely recycling what I have heard :)

Stamp Duty in Disadvantaged Areas Relief

If you buy property in an area seen as a ‘disadvantaged’ area, then you may qualify for Disadvantaged Areas Relief. The government will determine whether an area is seen as disadvantaged.

In this case, the 0% threshold is moved up to £150,000, as opposed to £175,000. If you are a first-time buyer you don’t need to apply as the threshold for first-time buyers is higher.

Zero-carbon homes Stamp Duty Relief

There is a relief from Stamp Duty for zero-carbon homes. All qualifying houses under £500,000 are exempt and houses bought for £500,000 or above will have their Stamp Duty bill reduced by £15,000.

Here’s more details from the HMRC website on Stamp Duty Tax relief .

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How much stamp duty you have to pay:

To find out how much stamp duty you need to pay when purchasing a property, please go to this article, How Much Stamp Duty Do I have To pay?

When you pay stamp duty:

You don’t just pay Stamp Duty when purchasing property; the charge is also applied on most transactions on land, grants or assignments of leases, and transfers of chargeable securities, for example, shares in companies.

How to avoid stamp duty:

There are two ways of avoiding stamp duty. Firstly, any properties purchased for under £120,000 don’t qualify for the tax fee. No Stamp Duty Land Tax is payable on these properties. However, buying properties for under £120k is becoming increasingly difficult due to the recent property boom, especially in the southerm region of England. 1 in 20 properties sold for less than £120,000 in London last year.

Secondly, an established Buy to Let investor who can afford to buy at least six properties at one time also qualifies for tax relief.

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How Much Stamp Duty Do I Have To pay?
Stamp Duty Land Tax (SDLT) Form

I’m not entirely sure if ALL solicitors charge extra for that, but mine sure as hell did. But to be honest, I didn’t mind that much, because with my conveyancing solicitors rates, I’m still saving a hell a lot of money compared to other solicitors I got quotes from.

What is a Stamp Duty Land Tax (SDLT) form?

“SDLT is a tax on transactions, not documents. When you buy a property or land, you must fill in a Land Transaction Return (SDLT1) and send it to HMRC. Your conveyancer/solicitor will normally complete the return for you as part of handling the transaction. But legally, you are responsible for the information submitted.

Once the return has been processed and the appropriate amount of tax has been paid, a ‘Land Transaction Return Certificate’ (SDLT5) is issued (this replaces the old impressed stamp.) You’ll need this certificate for the Land Registries in UK and Northern Ireland, or for the Registrars of Scotland when applying for registration of title or documents.”

More information here

There are also supplementary forms (SDLT2,3, 4). They may not apply to you.

SDLT 2 – Where there are two or more sellers and or/two buyers.
SDLT 3 – Where land is involved and more space than that provided on the SDLT 1 is needed.
SDLT 4 – For complex commercial transactions and leases.

Your solicitor should guide you accordingly, and inform you which ones apply to you.

Stamp Duty Land Tax (SDLT) form IS COMPLICATED

I received the form today…DEAR LORD. Absolutely ridiculous!! Even with the guidelines, it was like rocket science. I didn’t understand half the questions; I swear they intentionally made it as difficult as possible. In fact, I’m convinced the Government have a deal going on with all conveyancing solicitors where they get a cut of the charges for filling in that form just for making it so difficult, meaning they rely on all property buyers to get their solicitor to fill in the damn form.

Think you can handle it?

If you think you’re man enough to handle the form, here are is additional resources that may come in handy:

Example of the Stamp Duty Tax form (SDLT1) form:

http://www.hmrc.gov.uk/so/sdlt1-sample.pdf

SDLT1 guidelines to help you fill in the form:

http://www.hmrc.gov.uk/so/sdlt6.pdf

Tips on how to fill in the form:

http://www.hmrc.gov.uk/so/helpcard.pdf

Anyways, so I sent the form back to them with a cheque of £59.99 (bas***ds).

My advice is that if you get the option of filling it in yourself, decline the offer, especially if you’re a property amateur like myself. Trust me. But hey, if you don’t believe me, try it; you’ll only delay the process for your solicitor since you WILL send a blank form back to him/her. Ha!

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