Why Are We Charged Property Tax if We Own Our Houses?

The process of paying off your home can be long and arduous and in financially leaner times, be stressful. As you near that long-sought-after prize of homeownership, you may be wondering why you are still required to pay property taxes if you own your home outright.

This is a logical question and one that has many UK residents searching for answers. While there is no “property tax” in the UK like there is in Canada, Australia or other countries, there are taxes that are used for similar purposes and that most people residing in the UK are required to pay. Property tax, commonly referred to as council tax in the UK, is a levy imposed by local governments on UK residential property and commercial properties.

WHAT IS PROPERTY TAX?

Property tax, commonly referred to as council tax in the UK, is a levy imposed by local governments on residential and commercial properties. This tax is crucial for funding a wide array of local services that benefit the community. Unlike other countries, the UK does not have a unified property tax system, but council tax serves a similar purpose. The amount of property tax you pay depends on the location, type, and value of your property. This tax is essential for maintaining the quality of life in your area by supporting local services and infrastructure.

WHAT DO PROPERTY TAXES PAY FOR?

As is often quoted, the only two “unavoidables” in life are death and taxes. Since this seems to be true, one would at least hope that the taxes that you are required to pay (income taxes, property taxes, sales taxes) are doing some good in the hands of the government and are making a difference.

Although there is no specific “property tax” in the UK, there are many taxes that are levied against homeowners. Not all this tax revenue is easily traceable as it is used to fund the government’s many departments. When it comes to “property tax” and what it is used for, the allocation of council tax is the easiest to trace.

Council tax is a local tax, paid on a sliding scale based on the value of the home or residences in the area. Annual tax, such as the Annual Tax on Enveloped Dwellings (ATED), is also levied on corporate entities owning residential properties valued at £500,000 or more. What are these taxes used for?

• fire and police services

• leisure and recreation projects, such as maintaining parks and sports centres

• schools, libraries, and education services

• recycling and waste collection and disposal

• street cleaning, lights, road maintenance and all other transport and highway services

• environmental health and trading standards

• certificates for marriages, deaths and birth, local elections and all other administration and record-keeping services

Net rental income, calculated as gross rent minus various deductible expenses, also has significant income tax implications for property owners.

FUNDING LOCAL GOVERNMENT SERVICES

Property tax is a vital revenue stream for local governments in the UK, enabling them to provide essential services to the community. Here’s how property tax revenue is typically allocated:

• Education: Funds from property tax help maintain and improve schools, universities, and other educational institutions, ensuring that children and adults alike have access to quality education.

• Healthcare: Property tax revenue supports hospitals, clinics, and other healthcare facilities, contributing to the overall health and well-being of the community.

• Infrastructure Development: The development and maintenance of roads, bridges, and other critical infrastructure projects are often funded by property tax, ensuring safe and efficient transportation.

• Social Services: Property tax also funds social services such as housing, welfare programs, and community development initiatives, helping to support vulnerable populations and improve community living standards.

By contributing to these essential services, property tax plays a crucial role in enhancing the quality of life for residents.

MAINTAINING PROPERTY VALUES

One of the less obvious benefits of property tax is its role in maintaining and potentially increasing property values. By funding local government services, property tax helps to ensure that communities remain desirable places to live. High-quality schools, well-maintained roads, and robust healthcare services all contribute to a higher quality of life, which can, in turn, boost property values. Additionally, property tax revenue can be used for neighborhood improvement projects, such as beautification initiatives and safety enhancements, further increasing the attractiveness and value of properties in the area.

TAXES PAID BY PROPERTY OWNERS IN THE UK

• Stamp and Duty Land Tax

When there is a land transaction involved in England or Northern Ireland, there will be SDLT to pay. There are exemptions, such as where you buy your property, if it is your first home and the purchase price. SDLT for those that are buying a second home is subject to an “additional property” tax that tacks on an additional 3% to the appropriate SDLT tax rate. Buyers owning additional properties can incur higher tax rates, but there are specific provisions for refunding excess taxes paid due to ownership of multiple properties.

• Council Tax

Council tax is used to pay for local services and is determined based on the people living in your home, the value of your residence and other factors. Both UK tax residents and foreign nationals must pay tax on rental income received in the UK, and they can utilize double taxation treaties to avoid being taxed in both their home country and the UK.

• Inheritance Tax

This tax applies to property and assets that are transferred to another after the death of a person. Exemptions apply here as well, such as whether it is left to a spouse or civil partner, a charity or if it is under the threshold set by the HMRC. UK tax residents must pay tax on income received within the UK regardless of their residency status, and foreign nationals owning UK properties can leverage double taxation treaties to mitigate the risk of being taxed in both their home country and the UK.

• Capital Gains Tax (CGT)

CGT is meant to be applied to any financial gains made on a property or asset from the time it was purchased to the time it was sold. If you buy a property and sell it for a higher price, you may be required to pay capital gains, though there are exceptions for this tax as well. Additionally, income tax is applicable on rental income generated from real estate in the UK, with obligations for both UK residents and foreign nationals to pay income tax on UK-sourced rental income.

‍

• Additional Property Tax

SDLT for those that are buying a second home is subject to an “additional property” tax that tacks on an additional 3% to the appropriate SDLT tax rate.

OTHER PROPERTY-RELATED TAXES

In addition to property tax, UK property owners may be liable for several other taxes related to property ownership:

• Stamp Duty Land Tax (SDLT): This tax is paid by buyers when purchasing a residential or commercial property. The amount depends on the purchase price and whether the property is an additional property.

• Capital Gains Tax (CGT): If you sell a property for more than you paid for it, you may need to pay capital gains tax on the profit.

• Inheritance Tax (IHT): This tax is levied on the value of a property when it is inherited. Exemptions may apply, such as when the property is left to a spouse or civil partner.

• Land Transaction Tax (LTT): In Wales, buyers pay this tax when purchasing a property.

• Land and Building Transaction Tax (LBTT): In Scotland, this tax is paid by buyers when purchasing a property.

Understanding these additional taxes is crucial for property owners to manage their financial obligations effectively.

PROPERTY TAX CALCULATION AND VALUATION

Property tax is typically calculated based on the value of the property, which is determined by the local government. This valuation is usually based on the property’s market value. Once the value is established, the local tax rate is applied to determine the amount of property tax owed. If property owners believe their property has been overvalued, they have the right to appeal the valuation. This process ensures that property tax assessments are fair and accurate, reflecting the true value of the property.

By understanding how property tax is calculated and the valuation process, property owners can better manage their tax obligations and ensure they are paying a fair amount.

ARE YOU REQUIRED TO PAY CAPITAL GAINS TAX AFTER YOU OWN YOUR HOME?

Yes! Unfortunately, various forms of taxation will continue to be a part of your life as a homeowner, regardless of if you or the bank own the deed to the property. Certain types of tax, like council tax, can be reduced for a number of factors. Check with your local authorities to see what you could qualify for.

‍

TAX RELIEF FOR HOMEOWNERS

‍

• Annual Exempt Amount

For those who may have to pay capital gains tax, there is an annual exempt amount that all UK citizens receive which is £12,300.

‍

• Council Tax Reduction or Exemptions

Many factors may make you eligible for relief or exemption from council tax in your area. People in your home may be considered “disregarded” if they are:

‍

• under 18 years old

• on certain apprentice schemes

• 18 or 19 years old and in full-time education

• a full-time studentat college or university

• under 25 years old and get funding from the Education and Skills Funding Agency

• a student nurse

• a foreign language assistant registered with the British Council

• severely mentally impaired

• a live-in career for someone who is not your partner, spouse, or child under 18

• a diplomat

‍

You may also qualify for a reduction in your council tax if you meet other criteria. What are these criteria?

‍

• You will receive 50% off of your council tax if everyone in your home is “disregarded”.

• You will receive 25% off if everyone in the home outside of yourself is considered “disregarded” or if you live on your own.

‍

Private Resident Relief

‍ According to the HMRC, you are not required to pay Capital Gains Tax if all of these areas apply to your situation:

• you've lived in it as your main home for all the time you've owned it

• you have not let part of it out or used part of it for business only

• the grounds, including the buildings, are smaller than 5,000 square metres (just over an acre)

‍

This is the Private Resident Relief and is automatically applied, exempting you from Capital Gains if you meet the criteria.

‍

WHY ARE YOU CHARGED PROPERTY TAX AFTER YOU OWN YOUR HOME?

The revenue that these taxes generate for the government is used to fund its operations. Whether it be the council tax that funds the local services or the SDLT that gets absorbed into the HMRC tax revenue, these programs and departments need funding. Real estate and property are easy targets for taxation because they are easy to assess, regulate and enforce. After all, real estate and property don't move. They are always there, in the same spot, in plain sight.

As a source of taxation revenue, the issue of ownership of the land or property does not factor into the government's decisions. Buildings, residential properties, flats, and all other forms of property are fair game for property taxes as those taxes are to be used for the good of the people.

‍