When you’re building a house you usually have to pay stamp duty on the value of the site and in some instances, capital gains tax. Here’s what you need to know.
Stamp duty is the government tax levied for changing the documents that specify who owns a particular property. Property is defined as land, a new build or second-hand property, derelict or not. Normally, the only factor affecting the amount of stamp duty is the value of the property. Capital gains tax is imputed on any profit you make from selling an asset, and this may be something you may have to pay for your site depending on your circumstances and jurisdiction.
Remember that whenever a tax liability arises, HMRC (NI) or the Revenue Commissioners (ROI) have zero tolerance when it comes to its prompt payment. In addition, legal representatives of a person or business have little or no discretion on the calculation of payment or when it is due to be paid.
Therefore, whenever either stamp duty or capital gains liabilities arise, it is best to take legal advice and then deal with any payment in a prompt and timely manner.
Stamp duty in ROI
For stamp duty purposes a residential property includes a derelict or uninhabitable house. A building such as a church, schoolhouse, shop or barn scheduled for restoration as a dwelling, may not qualify as a residential property for stamp duty purposes.
Contact your local authority to find out if the property is considered commercial or residential. In the case of a house, stamp duty is calculated on the base price of the house before the VAT is added.
If a site is bought in connection with (or as part of) an arrangement to build a house or apartment on it, then stamp duty will be charged at the residential property rate of 1 per cent on the total of the site cost and the building cost.
Otherwise stamp duty will be charged on the site cost at the non-residential property rate of 6 per cent. If you’ve paid the 6 per cent rate you may qualify for the Residential Development Stamp Duty Refund Scheme for up to two-thirds of the amount of stamp duty you’ve paid.
For a single dwelling unit to qualify for the refund the gardens, paths and driveways must not exceed 1 acre (0.4047 hectares). The written document transferring the land must be executed on or after 11 October 2017.
In order to claim a refund, you must do the following:
- File a stamp duty return
- Pay stamp duty at the non-residential rate of 6 per cent on the transfer
- Have received a stamp duty certificate
- Commence building the house on the land within 30 months after the date of the transfer
- Develop the required proportion of the land for residential purposes
A refund claim can be made after building work commences and it must be made electronically. There is also a reduced stamp duty rate for those who are having land transferred to them for farming purposes; it’s called consanguinity relief.
When the relief applies the rate of stamp duty is 1 per cent but to qualify, you and the person who transfers the land must be related persons. Consanguinity is defined as being descended from the same ancestor as another person.
You must also either farm the land for at least six years or lease it for at least six years to someone who will farm it with the intention of making a profit from it, with terms and conditions applied.
If you do not pay for the property, or the amount you pay is less than the market value of the property, then the transfer of deeds will be considered as a gift and gifted land is liable for stamp duty.
However where a property is transferred on inheritance, no stamp duty is payable. Generally speaking you don’t have to pay stamp duty if you’re transferring property between spouses, civil partners or cohabitants.
Capital Gains Tax in ROI
Disposing of an asset doesn’t just refer to the sale of an asset for money. It includes any transfer of ownership by way of exchange, inheritance or gift. The standard rate of CGT is 33 per cent for disposals made on or after 5 December 2012.
Here are the main points to know about CGT for self-builders:
- Transfers of assets between spouses and civil partners are exempt from CGT
- Transfers of assets between spouses and civil partners who are separated are exempt from CGT if they are made under a Separation Agreement or a court order
- The transfer of a site from parent to child for the purposes of constructing the child’s principal private residence, where the site’s market value does not exceed €500,000, is also exempt from CGT
- There is no CGT on assets passed on death. But when the person who inherited the assets comes to dispose of them, the assets are treated as if they had been acquired at their market value on the date of the death so CGT is payable at that point of selling it on.
Stamp duty in NI
In NI stamp duty is paid when a residential property costing more than £125,000 (or more than £40,000 for second homes) is purchased. It applies to both freehold and leasehold properties and whether you’re buying outright or with a mortgage.
A first-time buyer does not pay stamp duty on a property worth up to £300,000. By definition a person is generally classified as a first-time buyer if they’re purchasing their only or main residence and have never owned a freehold or do not have a leasehold interest in a residential property in the UK or abroad.
If a property is bought by a first-time buyer for £500,000, stamp duty is paid on £200,000. If a property is purchased for more than £500,000, the standard rates of stamp duty apply.
Some exemptions to having to pay stamp duty or filing a return:
- No money or other payment changes hands for a land or property transfer
- Property is left to you in a will
- Property is transferred because of divorce or dissolution of a civil partnership
- Buy a freehold property for less than £40,000
If you plan to use your new property as your main home, or as a mix of residential and non-residential, it’s also exempt. If you’re moving house and are taking a while to sell your previous home, you will pay a higher stamp duty rate that can be reclaimed as long as you sell the property within three years and claim the refund within three months of the sale. Caravans or mobile homes are not liable for stamp duty unless they’re permanent fixtures.
Capital Gains Tax in NI
CGT is not payable on your home but it is on land and inherited property. If you sell a home you do not pay CGT if the following apply:
- You have one home and 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; this does not include having a single lodger
- you have not used part of it for business only
- the grounds, including all buildings, are less than 5,000 sqm in total
- you did not buy it just to make a gain
If you do not meet all these criteria you may have to pay some CGT. Married couples and civil partners can only count one property as their main home at any one time. The rules are different if you sell property that’s not your home or if you live abroad.
If you dispose of an asset you jointly own with someone else, you have to pay CGT on your share of the gain. In all cases CGT is only paid on gains above an annual tax-free allowance of £11,700. Usually CGT is not paid on gifts to husband, wife, civil partner or a charity.
When you inherit an asset, inheritance tax is usually paid by the estate of the person who’s died. There may be a need to pay CGT if the asset is disposed of at a later date.
The tax year is from April 6th to April 5th the following year. If they later sell the asset your spouse or civil partner may have to pay tax on any gain if they later dispose of the asset. Their gain or loss will be calculated from when you or they first owned it.
Disclaimer: This article is only a guide. Any decisions about payments, exemptions, reliefs or any other matter relating to reporting or payments need the benefit of professional advice before any decision is made.
The article refers to information specific to self-builders for property and land; it does not deal with any other transaction, for example shares and insurance products. Note that the references to NI include England but not Scotland or Wales.
NI stamp duty calculator is available on the HMRC website gov.uk/stamp-duty-land-tax/residential-propertyrates. ROI’s tax calculations are not as complex so you can manually calculate the standard rates. The Revenue website has guides and examples, revenue.ie
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