UK: Offshore Investment In UK Real Estate

Last Updated: 23 June 2015
Article by Philip Spencer and Steven Dowers

Offshore investors in UK real estate face a range of tax obligations and charges to be managed. This briefing introduces some of the key tax aspects for investors using various offshore structures.

UK tax on gains

Gains realised by non-residents on the disposal of commercial (non-residential) UK real estate are still tax free for non-UK investors. Gains on the disposal of residential real estate by non-UK resident individuals and trusts are subject to tax at rates of 18% and/or 28%. Non-UK resident companies that are 'narrowly controlled' are subject to tax on such gains at 20% and/or 28%.

UK tax on income

Net rental income after deductions (see below) is chargeable to UK income tax and calculated on an accruals basis. The rate of tax depends on the type of investor. Offshore companies are subject to a 20% rate. Non-resident individuals and trusts are subject to progressive income tax rates of up to 45%.

Annual tax on enveloped dwellings

An annual tax can apply to dwellings worth over £2m (£1m from 6 April 2015, £500,000 from 6 April 2016) owned other than by individuals. Commercially let properties are generally exempt but exemption must be claimed. If exemption is not claimed, the liability depends on the valuation band of each dwelling and ranges from £3,500 (at a value of £500,000) to £143,750 (at values of £20m and over). Annual returns (including claims for exemption) and tax payments are generally due by 30 April.

Financing

Interest on loans incurred wholly and exclusively for a UK rental business is generally deductible in calculating taxable income. Restrictions apply where the rate charged is not at 'arm's length' and on commercial terms. Interest payments may be subject to withholding at a rate of up to 20%. Structuring debt to take advantage of exemptions may be possible.

Tax depreciation

Generally, depreciation is not deductible from taxable income. Tax depreciation may be available for some fixtures, plant and machinery in commercial properties and certain multiple occupancy residential properties.

Determining what amounts can be claimed on a property acquisition or refurbishment project can be complex and, where previously claimed, the benefit of tax depreciation can be withdrawn on a disposal of the property. Specific advice on acquisitions and disposals is essential.

Repairs and renewals

In general, costs of repairing a property and items representing fixtures are allowable in calculating net rental income.

No deduction is available for replacing loose items of furniture but a wear and tear allowance of 10% of the rent less council tax and water rates may be claimed against the rental income from furnished residential property.

Losses

In general, unless properties are held by more than one entity, rental profits and losses across properties can be offset. Where there are excess losses in any year, these are carried forward and set against future rental profits.

Tax administration: non-resident landlord scheme

An annual tax return is required, assessing net rental profits for each tax year (6 April to the following 5 April). This return must be submitted by 31 January following the year of assessment. For example, the tax return for the tax year to 5 April 2015 must be submitted by 31 January 2016.

Advance agreement can be obtained for tax liabilities to be settled in three instalments payable on 31 January during the relevant tax year and on 31 July and 31 January following the tax year.

If an advance agreement is not obtained, the UK agent or the tenant will be obliged to withhold 20% of the rent payment and pay this to the tax authorities. Interest and penalties are generally payable in the event of late payment of tax or late submission of returns.

Value added tax

Generally, rents from residential property are exempt from VAT (currently 20%). Commercial property is generally exempt, but an election can be made to enable VAT to be charged. In making an election, thought needs to be given both to whether the seller has previously made an election and also to the VAT position of the tenant and that of any future purchaser.

New builds are subject to special rules.

Where a property is exempt, no VAT is chargeable on the rent or disposal consideration and VAT suffered cannot be reclaimed. However, where a formal 'option to tax' the property is made, VAT is chargeable on the rent and sales consideration but VAT suffered on expenses and on acquisition can be reclaimed. In certain situations, recoverability of VAT may be restricted.

Stamp duty land tax

SDLT is chargeable on the acquisition of UK property. A rate of 4% applies to commercial property acquired for consideration in excess of £500,000. Reduced rates apply to lower levels of consideration. Most residential property is charged at progressive rates of up to 12%. Residential property acquired for consideration in excess of £500,000 and owned other than by an individual can be charged at 15%.

Trading in land

Although gains on the disposal of some investment property can be exempt from UK tax, profits arising from a trading activity will generally be chargeable to UK tax. The UK tax authorities frequently challenge the status of offshore real estate investors where they consider trading activity to be undertaken.

For offshore companies dealing in real estate, UK corporation tax (or income tax where there is negligible UK activity and UK presence) can apply to their profits. From April 2015, both are charged at 20%. Offshore property development companies face a significant risk of their profits being subject to UK tax. Some planning to reduce this exposure may be possible.

Non-resident individuals and trusts are subject to income tax on both trading and development activities at progressive income tax rates of up to 45%.

Depending on where the trader is resident, the tax charge may be reduced or even eliminated through claims under appropriate double tax agreements.

Inheritance tax

On death, non-UK domiciled individuals are liable to IHT at a rate of 40% on the total value of their UK sited assets in excess of £325,000.

IHT exposure can often be reduced by owning property via an offshore company but this can give rise to a charge to the ATED and the 15% rate of SDLT on acquisition in the case of residential property.

How we can help

Cross border planning is complex. When correctly structured and implemented, there can be significant tax savings and cashflow advantages. Problems and higher tax charges can arise where proper advice has not been taken or structures have been incorrectly implemented and operated.

It is vital to take detailed tax advice on your plans before entering into a transaction to ensure that all UK tax obligations and charges are fully understood and managed.

Continual changes in tax law and practice mean that it is also important that existing structures are reviewed regularly to ensure that they remain tax-efficient and that all new compliance obligations are met.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.