If you’re planning to sell a property in the UK, it’s important to check where and how much tax you’ll have to pay. Contrary to popular belief, it’s not that simple. Your Polish nationality doesn’t necessarily mean you’ll have to pay tax in Poland. Similarly, the fact that your property is in the UK doesn’t automatically mean you’ll have to pay tax there. You also need to consider all the tax reliefs available to you to avoid paying more to the authorities than necessary. Does this sound complicated? Fortunately, with professional help, it doesn’t have to be!
Property Tax and Tax Residency
The starting point is to establish your tax residence, i.e. the country where you are liable to pay tax. This is crucial because you will only pay tax on the sale of a property in one country. Which country this will be depends on your tax residence status.
In this case, the place where the tax is paid is not necessarily the place where the property is located. What matters is which country is the centre of your interests and where you spend most of your time.
You are a tax resident of a country if you spend at least 183 days there in a given tax year.
On the other hand, you automatically acquire tax residency in the UK if:
- You spend at least 183 days in the UK during the tax year – remember that the tax year here starts on 6 April!
- The UK is the centre of your life interests – for example, you own or rent a home, have a family, have a job, etc.
et’s say you have to pay UK tax on the sale of your UK property – you spend most of your time there and it is the centre of your interests. The property you’re selling is also in the UK, so you’ll pay tax on the gain in the UK. As a result, you’ll be subject to UK tax law, not Polish tax law, which means you’ll pay Capital Gains Tax (CGT)
Before you pay tax on the sale of a UK property, make sure you’re eligible for Private Residence Relief!
The second important issue regarding the taxation of property sales in the UK is the Principle Private Residence (PPR). This is important because there are certain tax reliefs available in the UK. One of the most important when selling a house or flat is Private Residence Relief (PRR).
How does it work in practice? In theory, you have to pay Capital Gains Tax on any gain from the sale of a property. However, it’s different if the property you’re selling was your main residence. In this case, you may be able to avoid paying some or all of the tax through Private Residence Relief.
This relief is available to you automatically. You don’t have to fill in any forms or make any declarations. All you have to do is meet a few conditions:
- The property has been your main residence throughout the period of ownership,
- no part of it was used solely for business purposes,
- the property has been your permanent residence (except for permitted periods of absence or living elsewhere for work reasons),
- the garden or land, together with any buildings on it, does not exceed the permitted area (maximum 1.25 acres).
However, there is an additional exception – if the property was bought with the sole intention of selling it at a later date for a profit, you will not be entitled to PRR, even if you meet all the conditions described above.
How to calculate tax on the sale of property in the UK?
The situation is more complicated if you own several properties – for example, two properties in the UK and one in Poland. In this case, not all of them can be considered your main private residence. As a result, it’s likely that the property you’re selling won’t qualify for full relief.
The amount of the PRR depends on a number of factors, but mainly on the time spent living in the property and the income generated.
For instance, if the property was previously worth £600,000 and you’re now selling it for £800,000, the taxable income from the property will be £200,000.
You will also need to determine whether you qualify for the relief, i.e. whether the property qualifies as your PPR. It may turn out that it does, but not for the whole period of ownership.
This means that if, for example, you have owned the property for five years but it has only been your PPR for 2.5 years, only 50% of the income will be eligible for relief. Therefore, you will have to pay tax on the £100,000 gain.
But that’s not all – you’re also entitled to a tax-free allowance of £12,300, and if the property was rented out before being sold, there’s an additional relief of £40,000.
As you can see, there are many ways to reduce or even avoid paying tax. The UK system is very favourable to individuals selling their property.
However, without a thorough understanding of UK tax laws, you could miscalculate the taxable base or overlook some of the reliefs available to you. This could lead to real financial losses and a great deal of stress when correcting tax errors later.
Therefore, it’s best to consult a professional accountant who can calculate everything for you. This way, you can be sure that your tax has been calculated correctly and, most importantly, that you are taking advantage of all possible tax exemptions, avoiding unnecessary costs on the transaction.
