What Taxes Do You Pay When Buying or Selling Property in Central London?

Are you thinking of buying a new home or selling your property in Central London? If so, you may well want to consider what taxes you are liable to pay. If you don’t check in advance, you might be landed with a nasty surprise when your finances take an annoying and unexpected hit further down the line.  

To avoid this, it’s a great idea to get familiar with the basics so you can factor tax into your property sale or purchase. 

For example, if you live in Marylebone or Mayfair, there’s a high chance you’ll have to pay inheritance tax on your property unless you know the tax rules and have a plan in place. After all, you don’t want to pass on your £3.2m estate (average price in Mayfair according to Rightmove), and be landed with a 40% inheritance tax! You may also need to pay capital gains tax when you sell a property that is not your primary residence, such as a buy-to-let property. 

This article further explores the taxes involved in selling and buying a property in England. 

The different taxes to consider 

You may be liable to pay three types of taxation when buying or selling property.  

• Capital Gains Tax (CGT) – payable when selling a second (or third!) home 
• Inheritance tax – payable when your estate changes hands after you pass away  
• Stamp Duty Land Tax (SDLT) – payable when you buy a property 

These taxes will be explored in turn through the rest of the article. 

Capital Gains Tax 

You will likely pay Capital Gains Tax (CGT) when selling a second or additional residential property. If you’re selling your main home, this won’t typically apply to you since you’ll be eligible for Private Residence Relief, eliminating CGT. 

The amount of CGT you pay will depend on several factors explained below. 

What are the CGT rates and allowances? 

The first point to consider is that CGT isn’t paid on the whole sales value of a property – just the ‘capital gain’. In other words, you will only be taxed on the increase in the property’s value between the original purchase price and the price when selling the property. Also, the rates for CGT depend on your income tax band: 

• Basic rate taxpayers – Pay 18% CGT on property gains. 
• Higher rate tax payers & additional rate taxpayers – Pay 24% on their property gains.  
• The CGT exemption allowance – Every taxpayer has an annual tax-free CGT allowance. This is now £3,000 (reduced significantly from £12,300 in the tax year 2022/23 and £6,000 in the 2023/24 tax year). Gains after that amount will be subject to the usual rates of CGT. 

Want to know more? Sellers will also want to budget with our cost to sell a house guide and understand why your flat might not be selling.

How to calculate CGT for property? 

To calculate your Capital Gains Tax when you sell a property, you can work out your total ‘gain’ by subtracting: 

• The original purchase price from sale price. 
• The associated buying/selling costs (e.g. legal fees & stamp duty), 
• The cost of improvements made to the property. 

Remember! This does not include general maintenance and upkeep costs. 

For example, when you sell a second property in Marylebone, where the average sale price over the last year was £1.7m according to Rightmove, an illustrative calculation would be: 

• £1,700,000 minus £1,100,000 (example original purchase price) = £600,000. 
• Then deduct the associated buying and selling costs (including stamp duty), for example, £140,000. 
• £600,000 – £140,000 = £460,000 

Deduct costs of improvements spent on the property: 

• £460,000 – £100,000 = £360,000 
• CGT for basic rate taxpayer at 18% with £3,000 allowance = £83,563.80 
• CGT for higher rate taxpayer at 24% with £3,000 allowance = £85,680 

If your total ‘capital gain’ reaches beyond your annual allowance, you have to pay CGT on the excess. In theory, the amount of CGT owed can push you into a higher income tax band – so watch out for this. It’s important to add the capital gain to your taxable income to make sure you know how much you need to pay. 

How do you report & pay CGT?

You must report and pay CGT on residential property within 60 days of the sale, and do so in a separate tax return (aside from any self-assessment). Fail to report it, and you’ll find yourself subject to a fine and interest payments. 

Given the complexity of CGT, we recommend consulting a tax advisor to help you navigate the allowances, reliefs, and rates applicable to your specific situation. They can provide targeted advice to help manage your capital gains effectively. 

What are the Capital Gains Tax exemptions? 

CGT is not payable when a property is passed to a spouse or civil partner. If a property is transferred into a trust, this will usually defer the payment of capital gains tax until the trust sells the property. You may also be able to claim some capital gains tax relief if you lived in the property for a period of time. 

What’s Inheritance Tax (IHT)? 

Inheritance Tax (IHT) applies to the estate of someone who has died. The standard tax-free threshold (known as the ‘nil-rate band’) remains at £325,000. Estates valued below this threshold aren’t subject to IHT. It’s important to note that IHT applies to the value of the whole estate, not just property. That means you will have to consider the deceased persons assets as a whole when calculating IHT. 

If the estate is valued above £325,000, IHT is charged 40% on the portion that goes beyond the threshold. 

While 40% seems like a huge tax to pay, various exemptions/reliefs/tactics can (sometimes) prevent you from paying the whole amount. 

How can the IHT burden be reduced?

1. Leaving your estate to a spouse 

No IHT is due when the estate is left to a spouse, civil partner, a charity, or a community amateur sports club, regardless of the estate’s value.  

2. Leaving your estate to your children 

If you leave your home to your children, the basic threshold can increase to £500,000. This includes adopted, foster, or stepchildren, and is part of the residence nil-rate band. 

3. ‘Transferring’ the unused tax threshold to a surviving partner 

This is a very significant benefit. Essentially, it applies when a person dies leaving all they own to their spouse – and their £325,000 allowance goes unused. However, the surviving partner can add this unused allowance to their own allowance, doubling the IHT threshold for their estate to £650,000 when they die. Ultimately, this means the surviving partner could leave up to £650,000 to their heirs before any IHT is due! 

4. Giving to charity 

While the standard IHT rate is 40%, the government allows you to reduce this percentage by a small amount via charitable gifts. 

Essentially, when 10% or more of the estate’s “net value” is left to charity in the will, the payable IHT is reduced to 36%. The ‘net value’ is the total value, but minus debts and the nil-rate band. 

For example: say someone has an estate valued at £500,000 after debts/exemptions, and leaves £50,000 to charity (10%), the IHT rate on the remaining taxable estate can be reduced to 36%. 

5. Other IHT reliefs available 

There are several other reliefs available, such as the Business Relief and the Agricultural Relief. If these apply to your specific situation, then you can likely reduce your IHT even further. 

For detailed guidance on valuing an estate, you should refer to the UK government’s official resources on Inheritance Tax. The above information covers the basics, but there’s far more that a qualified financial advisor can tell you. 

What is Stamp Duty Land Tax (SDLT)?

Stamp Duty Land Tax (SDLT) is the tax you pay when you buy a property. It’s colloquially known as ‘stamp duty’. 

More specifically, Stamp Duty Land Tax is a one-off tax you need to pay when buying a property (or land) which costs more than a certain threshold. There are several tax rate bands for Stamp Duty, so the tax is calculated on the part of the property purchase price falling within each band. SDLT needs to be paid within 14 days of your property purchase completing. 

Want to find out more? You may also find it useful to read what a conveyancer does and how to stage your home for sale.

If you’re buying your main residence…  

When buying your primary residence, you are liable for SDLT for the proportion of your property above £125,000. If it’s under this amount, you pay no SDLT. The rate you pay for a higher value property is outlined below. 

SDLT tax bands: Here’s a summary of the different tax bands for the current tax year, and the proportion you pay according to the price of your property: 

• 0% – No tax to pay on homes worth up to £125,000. 
• 2% – On the portion between £125,001 and £250,000 
• 5% – On the portion between £250,001 and £925,000 
• 10% – On the portion between £925,001 and £1.5m 
• 12% – On the portion above £1.5m 

Here’s a real example: if you buy a home worth £300,000, you will be charged a 2% tax on the portion of the property value between £125,001 and £250,000 and you would pay 5% on the portion between £250,001 and £925,000. 

This equates to £5,000 in stamp duty tax. You can use the HMRC SDLT calculator to double-check. 

It’s no secret that properties in prime central London fall into the highest bracket of tax, so you’ll need to be prepared to pay a considerable amount in SDLT.  

To use the earlier example, buying a £3.2m home in Mayfair would mean you pay tax of £297,720 for stamp duty. 

If you are buying your first home…  

There’s good news for first-time buyers, who enjoy tax relief when buying their first property. They do not pay any SDLT unless their home costs more than £300,000.  

Here’s a real example: If a first-time buyer purchases a property for £500,000, they will not pay any SDLT on the first £300,000, and will pay tax of 5% on the remaining £200,000 = £10,000. 

First-time buyer SDLT tax bands summarised:   

• 0% – No tax on homes worth up to £300,000. 
• 5% – For homes between £300,001 to £500,000. 
• For properties above £500,000 there is no first time buyer discount. 

Once again, if you’re lucky enough to purchase a home in Marylebone or Mayfair as your first home, you probably won’t be lucky enough to avoid the usual SDLT tax bands due to the high property price there. As usual, there are some exceptions to the SDLT tax bands, so it’s worth checking the government website to be sure. The  HMRC Stamp Duty Calculator considers your personal situation to calculate the tax you’re due to pay. 

If you are buying a second or additional property…  

Unfortunately, SDLT prices are 5% more expensive for those buying a second or additional property. Even if the home you buy is below the tax-free threshold, you will still have to pay a 5% stamp duty tax. 

SDLT tax rates for second/additional property summarised:   

• 5% up to £125,000. 
• 7% on the portion from £125,001 to £250,000. 
• 10% on the portion from £250,001 to £925,000. 
• 15% on the portion between £925,001 and £1.5 million. 
• 17% on properties over £1.5m. 

At first glance, 5% surcharge does not seem a huge amount, but the examples below illustrate the increase in stamp duty you will pay on buying a second property.  

• For a property valued at £450,000, the SDLT will be £35,000. 
• For a property valued at £800,000, the SDLT will be £70,000. 
• For a property valued at £1,400,000, the SDLT will be £153,750. 
• For a property valued at £2,000,000, the SDLT will be £253,750. 
• For a property valued at £5,000,000, the SDLT will be £763,750. 

If you are an overseas buyer…  

If you’re a non-UK resident, then the rules about SDLT become even more complex. Essentially, buyers in this position must pay 2% more SDLT on their property purchase. However, this applies differently across different circumstances. Here’s a summary of how it works: 

1. For Main Homes and First-Time Buyers: If a non-UK resident is buying a property to use as their primary home, or as a first-time buyer, they must calculate SDLT based on the standard rates – and then pay 2% more in addition. 

2. For Additional Properties: If the purchase is for an additional property (e.g., a second home or a buy-to-let), the buyer pays the higher SDLT rates for additional properties, and once again – with an additional 2% surcharge. 

However, this is only scratching the surface. Non-resident buyers face more complex rules regarding property taxes, so it is well worth exploring the government guidelines in detail (and hiring a financial advisor). You can also read more in our article that covers Stamp Duty Land Tax in detail. And, if you want to calculate your property taxes, then try this online property calculator which covers the various bases of taxation and other expenses.

SDLT Exemptions 

There are certain stamp duty reliefs such as right to buy properties, property investment funds and charities. You can find further information about the relief on the gov.uk website. 

We can help  

If you are buying or selling a property in central London areas like Primrose Hill, Swiss Cottage, Kilburn, Fitzrovia, Regent’s Park, St. John’s Wood, Maida Vale and Pimlico – our experienced estate agent team are on hand to help you will all aspects of the transaction. Get in touch today. 

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