UK: Tax-Efficient Investment In UK Residential Property For Non-Residents: A Guide

Last Updated: 23 May 2018
Article by Terence Pay

UK real estate, particularly prime property in London, has always attracted significant international investment.

Many investors are simply looking to purchase a single UK property, perhaps to use as a London base, whilst others wish to invest in a portfolio of properties under single ultimate ownership. Many of these properties will be rented on the open market.

Advice should always be taken in advance of any purchase of UK real estate. The tax legislation in this area has changed significantly over recent years and care needs to be taken to ensure that the investment is structured in the most tax efficient manner. Taxes may be levied on rents, development profits and capital gains, and there are also stamp taxes, the ATED (Annual Tax on Enveloped Dwellings) and inheritance tax to consider.

This guide highlights the main tax issues to consider when investing in UK residential property.

INDIVIDUAL OWNERSHIP

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is payable by the purchaser at rates of between 0%-12% for residential property. Where a second residential property is purchased, the standard rates are increased by 3%.

Capital Gains Tax

From 6 April 2015, non-resident individuals are liable to capital gains tax (CGT) on the disposal of UK residential property, although only the portion of the gain arising after 6 April 2015 is taxable. The top rate of CGT is 28%.

Note that there may be a different tax treatment where a property is acquired, developed and sold on in a relatively short period of time, or where a main purpose of acquiring the property was to realise a profit on sale. In such cases, the profits are normally chargeable to income tax (or corporation tax if the gain is realised by a company), not capital gains tax.

Income Tax

Profits deriving from UK rental receipts are taxable in the UK in all cases. For non-resident individuals, the tax rate is between 20% and 45% depending on the level of profits and any other UK source income received by the taxpayer during the relevant tax year.

The letting agent or tenant is required to withhold 20% tax from net rents paid to a non-resident landlord. However, under the Non-Resident Landlords Scheme, approval can be obtained from HMRC for rents to be paid gross, providing an annual tax return is filed and tax paid on time.

Inheritance Tax

UK property is subject to inheritance tax (IHT) in the UK. Inheritance tax is charged at a flat rate of 40% above the nil rate band, which is currently £325,000 per individual. The nil rate band is transferable between married couples and civil partners. The IHT liability may be mitigated by taking out a third party debt secured on the property, although this would usually need to be done at the time of purchase. Further advice should be obtained.

COMPANY OWNERSHIP

There have been a number of tax changes over recent years, intended to discourage ownership of UK residential property through a corporate vehicle. The main changes in this area include:

  • Stamp Duty Land Tax (SDLT). A 15% rate of SDLT now applies to acquisitions of single dwellings valued at more than £500,000 by companies and certain other non-natural persons (NNPs).
  • Annual Tax on Enveloped Dwellings (ATED). ATED was introduced from 6 April 2013. It is an annual tax charge that applies to companies and other non-natural persons owning residential property valued in excess of £500,000.
  • ATED-related CGT. This applies to all disposals of residential property within the charge to ATED, at a flat rate of 28%.

Exemptions from the above charges may apply in certain situations (see below).

  • Non-Resident Capital Gains Tax (NRCGT). With effect from 6 April 2015, all non-residents (including companies and individuals) are liable to CGT on the disposal of UK residential property. Properties outside the scope of ATED-related CGT are within the charge to NRCGT, but only on the portion of the gain arising after 6 April 2015.

Note that disposals of shares in companies owning UK residential property are currently outside the charge to CGT when made by a non-resident, although this is likely to change with effect from 6 April 2019.

  • Inheritance Tax. With effect from 6 April 2017, UK inheritance tax was extended to UK residential property held by a non-UK company. This has been achieved by treating the shares of a company as UK situs assets, to the extent that the value of the shares is attributable to UK residential property. Following these changes, it is now no longer possible for a non-UK domiciled individual to avoid UK IHT on residential property by owning it through a non-UK company.

Below is a summary of the main points of the ATED and CGT legislation affecting UK residential properties held by a corporate vehicle.

Annual Tax on Enveloped Dwellings (ATED)

When the ATED was introduced in 2013, the threshold was set at £2 million, such that only properties worth above this amount were chargeable. However, the government has gradually reduced the threshold so that many more properties now fall within the ATED regime. The threshold is currently £500,000.

The ATED charges for the period 1 April 2017 to 31 March 2018 are:

Property Value £500,000 – £1m £1m – £2m £2m – £5m £5m – £10m £10m – £20m >£20m
Annual Charge £3,600 £7,250 £24,250 £56,550 £113,400 £226,950

The NNPs which may be taxable under the ATED are restricted to:

  • Companies, where that company has a beneficial interest in such a property (i.e. not where it acts as mere nominee for an individual);
  • Partnerships, where one or more partners is a company; and
  • Collective Investment schemes.

Trustees (including corporate trustees) are not subject to the ATED where they hold property directly.

ATED-related CGT

ATED-related CGT was introduced alongside the ATED, with effect from 6 April 2013. ATED-related CGT applies on the disposal of UK residential property by certain NNPs within the charge to ATED. The rate of ATED-related CGT is 28%.

Where the property was purchased before 6 April 2013, the charge to ATED-related CGT only applies to the part of the gain which accrued on or after 6 April 2013 (or the date that the property became within the ATED regime, if later).

Trustees are not within the charge to ATED-related CGT on direct disposal of such properties.

Exemptions

Exemptions from the 15% SDLT rate, the ATED and ATED-related CGT charges include:

  • Property development businesses
  • Properties let out as part of a property rental business where let out to third parties on a commercial basis (in most cases this will exempt properties acquired as "buy-to-lets")
  • Farmhouses and properties held by trading companies for the use of employees

As a result of the reduction in the ATED threshold to £500,000 and the increase in the ATED charges (by more than 50% since the regime was introduced in 2013), together with the 15% Stamp Duty Land Tax rate, exposure to the ATED-related CGT charge, and Inheritance Tax, corporate ownership is unlikely to be a tax efficient form of ownership for most new purchases of UK residential property, unless one of the above exemptions applies.

Individuals with UK residential property held in existing structures should review the impact of the recent increases in the annual ATED charges and the IHT changes to determine whether UK properties should be taken out of the structure and placed into personal ownership. Changing the ownership could give rise to tax charges and therefore it is essential to take professional advice to fully understand all the tax implications. Please refer to our briefing entitled 'De-enveloping' for further information.

Professional advice should always be taken to assess the effectiveness of any structure with regards to all relevant taxes.

SUMMARY

UK real estate continues to represent a popular investment choice for non-residents. Structured carefully, the UK and international tax leakage can be minimised.

Where an investment has been or will be made into residential property worth in excess of £500,000, further advice should be sought in the light of the ATED regime and associated tax charges where a corporate structure is being considered. However, a corporate ownership structure may still be beneficial provided one of the exemptions from the 15% SDLT rate, the ATED charge and the ATED-related CGT charge is available.

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.

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