Prime residential property in the UK, and luxury London property in particular, remains a popular investment choice for many foreign investors. Property in the UK has proved to be a solid investment choice over the years and has offered high capital growth and, where rented, good income returns for investors.
There have however been significant changes to the UK property tax regime over the past three years as the UK government has sought to fill deficits and, in their eyes, ensure everyone is paying their fair share of tax.
There are a number of tax charges that can arise on the purchase, the holding and renting, and sale of residential property in the UK. This guide summarises the tax charges that can arise and the importance of tax planning your existing and future UK residential property investments.
Options for Acquiring UK Property
The principal options for acquiring and holding UK property are as follows:
- direct ownership by an individual;
- ownership through a holding company; and
- ownership through a trust.
Which option is appropriate, particularly in relation to tax, will depend on a variety of factors and these are explained in this bulletin.
Taxation of UK Property
There are five main categories of UK taxes that are relevant in the context of ownership of UK residential property:
- stamp duty land tax (SDLT) is paid by the buyer on the purchase price;
- annual tax on enveloped dwellings (ATED) is an annual charge levied on high-value residential property held through a company;
- capital gains tax (CGT) on a disposal of the property at a gain;
- income tax on any rental income from the property: and
- inheritance tax (IHT) on transfers of value on death or, in specified circumstances, during an individual's lifetime.
Stamp Duty Land Tax (SDLT)
SDLT is paid by the buyer (individual, company or trust) on the purchase price. The rates of SDLT have been significantly increasing in recent years and from 4 December 2014 the actual effective rates are as follows:
|Purchase price or transfer value||SDLT rate|
|GBP 0 - 125,000||Zero|
|GBP 125,001 - 250,000||2%|
|GBP 250,001 - 925,000||5%|
|GBP 925,001 - 1,500,000||10%|
|GBP 1,500,001 or more||12%|
|GBP 500,001 or more owned by a company||15%|
Different rates apply to different consideration bands and only the consideration falling in each band is taxed at that rate. There is a calculator on HMRC's website that will calculate SDLT.
Companies that purchase residential property pay in accordance with the scales above up to GBP500,000 and thereafter pay 15% on the value above GBP500,000.
The 15% rate does not apply to property that is:
- held as a rental property and is rented to unconnected third parties (HMRC define connected as direct relatives (brother, sister, ancestor or linear descendants – cousins are not relatives) or related by marriage or civil partnership);
- for public use (such as a museum);
- bought by property developers for development or trade;
- occupied by employees;
- acquired by financial institutions in the course of lending; and
- farmhouses (that are working farms).
Note that the property must continue with the above use for 3 years from purchase otherwise SDLT at the rate of 15% can be clawed back by HMRC if there is a change of use that does not offer relief.
The purchase of a company owning residential property will not give rise to an SDLT charge. Stamp Duty (at a rate of 0.5% of the purchase price) will be payable on the purchase of the company's shares.
Annual Tax on Enveloped Dwellings (ATED)
This so called "mansion tax" was introduced by HMRC to combat the ever increasing number of properties held through companies that were avoiding paying SDLT by holding residential property in corporate vehicles and selling the shares in the company rather than the property. The SDLT scope was changed to catch companies and saw the 15% rate introduced (detailed above), but HMRC took this a step further and also introduced ATED.
ATED is an annual charge on companies that hold residential property that is occupied by connected tenants (see definition above). Where a residential property is rented to an unconnected third party on commercial terms then relief is available from the ATED regime provided the relief is claimed annually in a return to HMRC. The additional reliefs noted under SDLT (farmhouses etc.) also apply to ATED.
ATED was introduced from April 2013 to catch properties held in companies that were valued above GBP2 million at 1 April 2012. In the Budget 2014 this threshold was reduced to GBP1 million with effect from 1 April 2015 and a further reduction to GBP500,000 was announced from 1 April 2016. This new band of properties between GBP 500,000 – GBP1m will have an annual charge of GBP3,500.
|Property value||1 April 2013 - 31 March 2014||1 April 2014 - 31 March 2015||1 April 2015 - 31 March 2016|
|GBP 1,000,001 to 2m||n/a||n/a||GBP 7,000|
|GBP 2,000,001 to 5m||GBP 15,000||GBP 15,400||GBP 23,350|
|GBP 5,000,001 to 10m||GBP 35,000||GBP 35,900||GBP 54,450|
|GBP 10,000,001 to 20m||GBP 70,000||GBP 71,850||GBP 109,050|
|GBP 20,000,001 or more||GBP 140,000||GBP 143,750||GBP 218,200|
If the property interest is held on the first day of the chargeable period (i.e. 1 April), the full amount of the annual chargeable amount as set out in the table above is due. If the property interest is acquired during a chargeable period, a proportion of the annual chargeable amount is payable.
Capital Gains Tax (CGT)
ATED Related CGT
From 6 April 2013, UK and non-UK resident non-natural persons will be subject to CGT at 28% in respect of gains accruing on the disposal of interests in high value residential property that is subject to ATED.
Unless an election is made to use the value of the property on an earlier date, only gains or losses on the property arising since 6 April 2013 are relevant when working out the charge to CGT.
Relief is also available from this charge on the same basis as the annual charge. Where the property held has been let and owner occupied, the gain is apportioned between periods.
Non-Residents CGT (NRCGT)
Up until recently, in most cases non-UK residents paid no CGT in the UK when disposing of a UK residential property. As an exception, where ATED applies in relation to a property, gains accruing on disposal are chargeable to CGT (ATED related CGT). From 6 April 2015, NRCGT was introduced to capture the disposal of all UK residential property by non-UK residents subject to some limited exemptions, where for example the property is held by a widely held company such as an investment fund or the property in question is used as student accommodation or a nursing home. This applies to all non-UK residents including individuals, companies and trust.
|Property holder||CGT rate|
|Non-resident individuals||18% and 28%, but after annual exempt allowance (the rate depends upon total taxable income and marginal rate)|
Any gain arising from 6 April 2015 will be taxed. Where a property falls within the ATED regime, the ATED related CGT charge will take priority over the new NRCGT charge for non-residents. There is no minimum threshold for this charge to apply and there is also no exemption for rental properties or property developers unlike under the ATED regime.
When a property is sold a capital gain return has to be submitted within 30 days of the sale of the property with the payment of tax also being due within 30 days of the disposal. That is unless the entity is already subject to tax as, say, a non-resident landlord and then the tax may be paid in accordance with the 31 January and 31 July payments on account.
Properties held for rental attract tax on the rental income as follows:
|Property holder||Tax rate|
|Non-resident individuals||Between 20% and
(set by incremental bandings)
|Non-resident trustees of a discretionary trust||45%|
As such all non-resident individuals and entities have an obligation to register with HMRC and file a Self- Assessment Tax Return each year.
Inheritance Tax (IHT)
In the Summer 2015 Budget, the government announced proposals to introduce new rules to ensure that UK residential property held directly, or indirectly by non-UK domiciled individuals or by excluded property trusts will fall within the scope of UK IHT. These changes will apply from April 2017.
UK domiciled individuals are subject to IHT on all their worldwide assets (subject to various reliefs and exemptions). Individuals who are neither UK domiciled nor deemed domiciled (often referred to as "non-doms") for IHT purposes, until April 2017, are only subject to IHT on their UK assets (whereas their foreign assets are excluded from the scope of IHT). Previously a non-UK domiciled individual could avoid UK IHT by holding UK property through an offshore structure typically utilising a trust and company structure. This will no longer be the case post 5 April 2017.
The intention is that this IHT change will apply to all UK residential property whether it is occupied or let and regardless of value. The IHT rate on death is 40% and the current nil rate band is GBP325,000. Holding UK situs assets in a trust attracts an IHT charge at each 10 year anniversary of the trust. Calculating the rate can be complicated, but in essence this is based at 6%, thereby giving a straight line cost of 0.6% per annum over the 10 year period.
In order to ensure the value of UK residential property is subject to UK IHT changes will be made to the existing Chargeable Transfer, Potentially Exempt Transfer, and Relevant Property Regimes (more information on this can be found on HMRC's website www.gov.uk/government/organisations/hm-revenue-customs).
WHAT TO DO?
Given the recent changes (including the substantial increase in ATED), it would be advisable to review existing arrangements. In some cases the substantial increase in ATED will prompt a re-examination of whether holding the property via a company is the best long-term option. Especially since the payment of ATED, post 5 April 2017, will not secure protection from an inheritance tax charge. Each situation – the purpose of the property being held and the longer term objectives – needs to be scoped, fully considered and costed out from a tax perspective to achieve the most suitable tax planning strategy.
There are three main options for acquiring property in the UK - individually, through a company, or through a trust. Which option is most appropriate (particularly in relation to tax) will depend on a variety of factors and must be scoped and assessed on a case-by-case basis to ensure the objectives of the property purchaser are understood and efficiently tax planned.
These recent tax law changes are being driven by a change in the UK political landscape and the drive for tax revenues. Tax planning is ever more critical and now is the time to assess your affairs.
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.