Residential Property Taxes in the United Kingdom
How Does Property Evaluation Work in the U.K.?
For property owners in the U.K., many of the regulations, taxes and methods of property evaluation date back centuries and have undergone periodic adjustments and adaptations to reflect today’s realities.
Each country within the U.K. is subject to its own valuation codes and taxes, so a property in Wales, for example, is evaluated and taxed differently from one in Northern Ireland, Scotland, or England. For U.S. property owners, a key difference between the way property tax is legislated in the U.K. vs in the U.S. is that U.K. property taxes are legislated at the national level and executed at the municipal level as compared to the U.S., which generally legislates at the state level and executes at the municipal and county levels of government.
There are a myriad of tax categories and duties to be paid by U.K. property owners. Among the most relevant to today’s property owner in the U.K. are: the Council Tax, the Stamp Duty Land Transfer Tax, the Land and Buildings Transaction Tax, and the Annual Tax on Enveloped Dwellings.
What is the Council Tax?
The Council Tax, a residential property tax, was introduced by the Local Government Finance Act in 1992 and implemented in 1993. The tax funds local services like police, fire, parks, garbage collection, libraries, education and other services, similar to the way local property taxes work in the United States. Unlike the U.S., however, where the owner of a property is responsible for property tax, the Council Tax is the responsibility of the occupants of a property. Occupants aged 18 or older are jointly responsible for the taxes on the property. Also in contrast to the U.S., which tends to bill property owners quarterly, the Council Tax is billed annually on April 1st and includes a 10 month payment schedule the residents must follow to fulfill their tax obligation.
The Council Tax . . . funds local services like police, fire, parks, garbage collection, libraries, education, and other services . . .
Similar to California’s acquisition-based value approach, U.K. property values are determined by the sales price of properties in a given year and adjusted annually from the initial acquisition price. In England and Scotland, the date of reference to determine a property’s Council Tax band is April 1, 1991 whereas in Wales it’s April 1, 2003, the dates when properties were last revalued in these countries.
Under Council Tax regulations, properties are categorized in bands from A-H based on their value; the banding system is the means by which a locality equitably taxes a community. For example, a property in England worth £40,000 or more would be in band A and a property worth £320,000 or more would be placed in band H. Bands are set by the local councils themselves, so bands differ from locality to locality.
What band your property falls under determines the amount of taxes you will pay as proportionate to the other bands. For example, a resident of a Band A property would pay 2/3 of someone living in a B and D property and 1/3 of someone living in a B and H property.
The abatement process in the U.K. is similar to that in the U.S.; property owners can dispute their Council Tax band in the hope of paying less taxes by applying for relief with their local council and explaining why their property valuation is wrong. Should the local council reject the application, the property owner can appeal the decision to a valuation tribunal, which then decides if a hearing is necessary and hears the case before coming to a decision.
In addition to abatement, it is also possible to apply for Council Tax relief discounts based on the number of occupants in a home. For example, a property inhabited by one person would be eligible for a 25% discount on the tax. Full-time students are exempt from paying the tax and local councils also offer discounts based on occupant income and disability.
What are the Stamp Duty Land Transfer and Land and Buildings Transaction Taxes?
Originally introduced as far back as 1694, the Stamp Duty Land Transfer (SDLT) tax used today was last updated with the Finance Act of 2003 and applies to properties purchased in England and Northern Ireland. SDLT is administrated by the federal HM Review and Customs department who are responsible for the administration of public funds.
Buyers acquiring non-commercial or mix use property pay a one-time, self-assessed SDLT, wherein the buyer calculates the taxes themselves based on the transaction price and is responsible for filing the tax payment upon completion of the acquisition.
If purchasing a residential property for the first time, buyers will pay the following SDLT rates:
However, if the buyer already owns one or more residential properties, the SDLT they’ll pay when purchasing another property will be an additional 3% on top of these rates.
Scotland uses a different system called the Land and Buildings Transaction Tax (LBTT). Administered by Revenue Scotland, with support from Registers of Scotland (RoS), the LBTT replaced the Stamp Duty tax on April 1, 2015 and applies to both residential and non-residential land or property and to both freehold and leasehold properties. A 4% supplemental rate, called the Additional Dwelling Supplement and charged on top of the standard single-dwelling rate, applies when a property owner buys and owns more than one property. Interestingly, LBTT also applies in Wales, with the Welsh Revenue Authority (WRA) collecting the tax for properties purchased after April 1, 2018.
What is the Annual Tax on Enveloped Dwellings?
The HM Review and Customs Department also charges the Annual Tax on Enveloped Dwellings (ATED) on residential dwellings within the U.K. that were owned or acquired after April 1, 2013 by Non-natural Persons (NNPs). For the ATED, an NNP is considered 1) a company; 2) a partnership with a corporate partner; 3) a collective investment scheme. Properties valued and taxed under the ATED are revalued every five years.
The following table explains who must pay the ATED:
According to Lexis PSL, the ATED “ was introduced as part of a package of measures aimed at making it less attractive to hold high-value U.K. residential property indirectly, e.g. through a company, in order to avoid or minimise taxes such as stamp duty land tax (SDLT) on a subsequent disposal of the property.”
NNP property owners are subject to a fixed rate tax according to the value of the property. The rates from April 1, 2022 – March 31 2023 are set as:
There are several scenarios where property owners may file for relief or exemption from the ATED. For example, farmhouses where a farm worker or former long-term farm worker is living qualify for a relief as do owners of properties who have registered as being social housing providers and trading companies who use the property to house employees. Charitable companies whose properties are used for charitable ends are eligible for exemptions. Property owners can also appeal their ATED tax or dispute their dwelling status by sending a written letter to the HM Review and Customs department.
This brief overview of key residential real estate property taxes in the U.K. is just the beginning. If you’re interested in learning more, we recommend you visit the following websites:
- https://www.irrv.net (the Institute of Revenues Rating and Valuation is the U.K.’s equivalent of the IAAO in the U.S.)