UK: The Taxation Of UK Residential Property - What Is The Current Situation?

The past few years have seen dramatic changes to the taxation of UK residential property in respect of both UK and non-UK residents and detailed below is a summary of the current position (as of July 2018) and proposed changes. 

It is important that existing structures (particularly those with foreign company ownership) are continually reviewed to ensure that the anticipated benefits of such structures remain relevant.

On Purchase of the Property

Before changes to the England and Northern Ireland Stamp Duty Land Tax (SDLT) rates were announced, the SDLT regime worked on a ‘cliff edge basis’ and had a top rate of 7% (having been 4% for several years).  A series of amendments to the SDLT regime have resulted in two charging systems for SDLT:

1. If a property is acquired in the personal name of an individual, the SDLT rate is charged on a stepped basis rather than on a cliff edge basis, as detailed below:

2. If the property is acquired through a corporate structure the SDLT rate will be 15% on the entire amount.  The only exception to this is if the residential property is acquired by a property development company, in which case SDLT will be charged at the same rate as for an individual.

An additional 3% is payable where a second or subsequent property is purchased, with a small number of exceptions. Worldwide property ownership is taken into account when considering whether a property is an additional residential property.  Buy to let investors or those purchasing a second home will therefore pay the extra tax, and trustees also fall within the scope of the 3% extension, unless a specific exemption applies. For this purpose, spouses are treated as one person so the extra SDLT cannot be avoided by purchasing properties in separate names.

SDLT is charged on the full acquisition price of the property.

During Ownership of the Property

The Annual Tax on Enveloped Dwellings (“ATED”) is a UK tax, which was introduced in 2013. Subject to certain exceptions, it is payable in respect of any residential property situated in the UK that was worth more than £1million in April 2012 or worth more than £500,000 in April 2016, and was/is owned or acquired, in whole or in part, by a company.

ATED is charged on a daily basis and is payable annually in advance. Penalties and interest may apply to late and/or incorrect returns.

From April 2018 the annual charges range from £3,600 per annum through to over £226,950 per annum for properties worth over £20million.

On Disposal of the Property

The exemption from Capital Gains Tax (CGT) on UK situs assets disposed of by non-residents of the UK, no longer applies in respect of residential property. Generally all residential property, other than that used by the owner as his principal private residence, is now subject to CGT on disposal.

Amendments have been made to the CGT element of the tax regime:

1. Any property that was subject to ATED is also subject to CGT on its disposal, at a rate of 28% on the gains, since the property became subject to ATED. Initially this meant that lower value properties, and properties rented out, which both previously fell outside of the ATED regime, were not subject to CGT on disposal.

2. Where non-resident companies do not fall within the ATED regime the CGT rate on the disposal of residential property is 20%.

3. Residential property owned by individuals, whether rented out or not, is now subject to CGT on disposal for gains arising since 2015. Individuals are taxed on such gains at either 18% or 28%, dependent on the total amount of UK income and gains received by the taxpayer.

In the event of a transfer from a corporate owner to its shareholder(s) (as is considered below and is known as “de-enveloping”), the market value at the time of transfer is deemed to be the sale value for CGT purposes.

On Death

As from April 2017, all UK situs residential property has been subject to the UK Inheritance Tax Regime (IHT), irrespective of the ownership structure. 

Inheritance tax is chargeable at 40% of the market value at the time of death and is also potentially chargeable if the property was gifted away within 7 years prior to death. 

Each individual has a £325,000 nil rate band (£650,000 per couple) and this will increase to a maximum of £500,000 per individual (£1million per couple) in 2020, where the property is the main residence of the deceased.  This allowance is restricted for estates with a net value of more than £2million.

Recent Developments

UK residents will be required to make a payment on account of CGT within 30 days of completion of a residential property disposal, effective from 6 April 2020. The same will apply to non-residents from that date, as the exception for making a payment on account for those submitting self-assessment returns will be abolished.  The reporting requirement for non-residents will be expanded to include companies from 6 April 2019.

Steps to Take Regarding Residential Property Currently Owned within a Corporate Structure

If a property owning corporate structure is retained, ATED charges will remain and the protection that such a structure previously provided against UK IHT and CGT will no longer be available.

It is possible to liquidate the owning company and to pass the residential property to the beneficial owner as a ‘distribution in specie’, a process known as de-enveloping.

If managed correctly, and the property is not subject to a mortgage, it is possible to avoid SDLT on the transaction. However any gain in the value of the property from April 2013 or from 2015 (please see earlier section ‘During Ownership of the Property’) will be subject to either an ATED CGT charge or a normal CGT charge.

All existing structures should be examined and professional advice taken on whether, and how, to de-envelope.

Considerations for New Property Acquisitions

When acquiring UK residential property it is important to consider the ownership structure prior to an exchange of contracts. 

As indicated above, the CGT and IHT positions for the owner of a UK residential property, personally or through a company, are now broadly the same, and organising the ownership via a corporate structure will incur an ATED charge, in most cases, with no additional tax benefits. 

Other objectives may, however, also be of importance. For example, a structure may be required to provide confidentiality, and this would need to be carefully planned in order to minimise tax liabilities.

How Can Dixcart Help?

We can assist in reviewing existing and potential UK residential property ownership structures to determine the optimum course of action and/or if it is necessary to restructure such investments.

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.