BUYING, SELLING AND OWNING
PROPERTY IN THE UK
Immigration Tax Advisors
There are no restrictions on foreign individuals owning residential or commercial property in the UK. Property can be owned in a person’s sole name, jointly (where each party has equal rights and on the death of the first joint owner it automatically goes to the survivor), or as tenants in common (where each party has a defined interest in the property and on the death of the first tenant in common it can be given away in accordance with the deceased’s will).
There are also fees and taxes chargeable on the sale of property and rental income. However, there are opportunities to reduce exposure to these charges through effective tax planning that Expat UK are able to provide.
PLANNING AHEAD WITH CLEAN CAPITAL
Individuals who are planning to use remittance basis, will only need pay tax on foreign income and gains to the extent that they are brought to the UK, must be careful to purchase property, fund a deposit or pay ATED charges using clean capital if possible.
We can help to segregate sources of capital, income and gains before a property in the UK is bought, or better still, before a client becomes UK resident, in order to ensure that only clean capital is utilised.
Expat Ltd are able to analyse remitted funds brought to the UK to calculate any tax due and identify the funds that will be used to buy property without creating a taxable remittance.
The danger of remitting taxable foreign income and gains to the UK is also present if the purchase of a property is by way of a loan. This loan is viewed by HMRC as a UK relevant debt and if any capital repayments or interest on the loan are paid using foreign income or gains it is treated as a taxable remittance.
TAX ON ACQUISITION (SDLT)
Stamp Duty Land Tax or SDLT is a tax you pay when buying a UK residential property or a UK commercial property
Stamp Duty is also known as Stamp Duty Land Tax and is a fee levied by HM Revenue and Customs when you buy a property. The fee is charged to the buyer of the property and the amount will depend upon a variety of factors. The stamp duty land tax SDLT applies to the UK property purchased after a price exceeds £125,000.
All those investing in UK residential property should consider their residence status under these rules – which may be different to their residence status for other UK tax purposes.
From 1 April 2021 a 2% non-resident SDLT surcharge will apply to purchases of both freehold and leasehold property, as well as increasing the SDLT payable on rents on the grant of a new lease. The surcharge also applies to certain UK resident companies that are controlled by non-UK residents. There are special rules for co-purchasing spouses and civil partnership
SDLT is payable at 15% on residential property acquired by non-natural persons (e.g. companies) with a value of more than £500,000 unless one of the exemptions applies. For example there are exemptions for property letting businesses and property developers.
A non-resident company will be liable for the 2% surcharge if on the effective date of the chargeable transfer:
- The company is not UK resident for UK corporation tax purposes, or
- The company is subject to UK corporation tax but it is a ‘close company’ which is controlled by one or more persons who are not UK resident (using the above SDLT test for residency) unless exemptions apply.
There is 3% surcharge on the regular SDLT rates for purchasers buying a second residential property. There is an exemption for those temporarily owning two homes as a result of moving house.
The SDLT surcharge test states that an individual is UK resident if that individual is present in the UK on at least 183 days during any continuous period that:
- Begins with the day 364 days before the effective date of the chargeable transaction, and
- Ends with the day 365 days after the effective date of the chargeable transaction.
For trusts, if any of the Trustees is a non-UK resident then the trust is deemed non-UK resident for SDLT purposes. However, this does not apply to bare trusts or interest in possession settlements. As in common with most tax legislation the relevant individual whose residency must be assessed on any UK residential property purchase in these circumstances is the underlying beneficiary.
The new SDLT surcharge is a flat 2% which will apply across all rates of SDLT, meaning that the maximum SDLT payable on any UK residential property transaction is an astounding 17%. The maximum rate of 17% would be relevant to a non-UK resident purchasing a property for in excess of £1.5million, who already owns another UK residential property (and were therefore already subject to the 3% SDLT surcharge for additional properties). The surcharge will also take the rate of corporate purchases of UK residential property (through a company) potentially to the maximum 17% (although with the usual exemptions, i.e. property rental business).
TAX ON MAINTENANCE (ATED)
Annual Tax on Enveloped Dwellings (ATED)– is an annual tax on high value UK residential property. It is payable on a single dwelling property with a value of £500,001 or more where that property is owned by a “non-natural person” e.g. a company, partnership or unit trust. There are reliefs available when the property is involved in a business (e.g. commercial letting or where it is part of a redevelopment) providing the property is not inhabited by anyone connected to the ultimate beneficial owner. There are many other reliefs which we can advise on.
Since the introduction of ATED, it is not necessarily cheaper to hold a property in a structure if the owner intends to use it as their main residence, as long as advice is taken on Inheritance Tax. A bare trust or nominee company may be used for anonymity.
We can advise on which property holding structure is appropriate to your individual circumstances and offer guidance on restructuring if necessary. If an offshore company is the best route to follow we can advise on calculating the tax owed relating to ATED and submit ATED returns to HMRC on our clients’ behalf. We also help to bring historic ATED filings up to date.
Taxable value of interest in property
£500,001 – £1,000,000
Annual Chargeable Amount
|£1,000,001 – £2,000,000||£7,500|
|£2,000,001 – £5,000,000||£25,200|
|£5,000,001 – £10,000,000||£58,850|
|£10,000,001 – £20,000,000||£118,050|
|£20,000,001 +||£236,250 each year|
TAX ON RENTAL INCOME FOR NON-RESIDENT LANDLORDS
Opting out of the non-resident landlord scheme (NRLS)
If you live overseas but you receive income from letting out a property in the UK, this income is generally taxable in the UK like any other UK-sourced income. This is the case regardless of whether or not you are resident or non-resident in the UK for tax purposes and regardless of where the income is physically paid.
However, as it can be difficult for HMRC to pursue individuals who live outside the UK and do not comply with their UK tax obligations, UK law seeks to collect tax on the rental income before it is paid to the overseas landlord under the NRLS. It does this by imposing on the UK letting agent an obligation to withhold tax on the rental income before it is paid to the overseas landlord. Where there is no UK letting agent, the tenant themselves must withhold tax personally if the rent they pay to the overseas landlord is more than £100 a week.
Any tax withheld by the letting agent or tenant is then available as a deduction against the overseas landlord’s UK tax liability when they complete a UK Self Assessment tax return. The NRLS does not change whether or not the UK property income is taxable.
Non-resident landlords will usually be required to file a Self Assessment tax return, even if there is no tax to pay
If you have UK rental income, you will be treated as a non-resident landlord for the purposes of the NRLS if you have a ‘usual place of abode’ outside the UK. This is not defined in law, but in practice HMRC normally regard an absence from the UK of six months or more as meaning a person has a usual place of abode outside the UK. Confusingly, it is therefore possible to be treated as a non-resident landlord for the purposes of the NRLS but in fact be UK resident for tax purposes.
Note that companies and trustees can also be non-resident landlords.
It is usually beneficial to apply to HMRC to be permitted to receive the income gross and make maximum use of any available allowances and reliefs, before calculating and paying this tax through Self Assessment. We can make this application on your behalf, as it requires confirmation that past and future tax obligations are satisfied.
Companies with a registered office or main place of business outside the UK that rent out property in the UK should also complete UK corporation tax returns to ensure they maximise tax reliefs.
TAX ON SALE (CAPITAL GAINS TAX ON THE SALE OF UK PROPERTY)
When the property is disposed of, Capital Gains Tax (CGT) may be payable on the increase in value of the property from the date of acquisition to the date of sale, less allowable expenses and the annual CGT exemption (which is currently £12,300). CGT is charged at 18% or 28%, depending on the level of the owner’s income and gains in the year of sale.
Gains on the disposal of a person’s only or main residence are usually exempt from CGT (known as principal private residence relief or PPR).
Non-resident individuals, trustees and partnerships must report to HMRC if they sell or dispose of UK property. This also applies when a non-resident sells shares in a property rich company.
A property rich company is defined as a company where at least 75% of the market value of the company’s assets is derived from UK property, and the investor owns at least 25% of the company.
To determine whether a company is property rich the test is on the gross asset value, so any loans or other liabilities are ignored.
Since 2019, non-resident companies pay corporation tax on any gain rather than Non Resident Capital Gains Tax. This may create filing obligations and possible liabilities for penalties for non-resident companies that did not previously have to submit a corporation tax return in the UK.
We can review the ownership of your property to make sure that it is structured in the most tax efficient way. We can consider any relevant reliefs that may apply, such as Private Residence Relief.
PRIVATE RESIDENCE RELIEF (PRR)
If a property was continuously occupied as a main residence, it is exempt from Capital Gains Tax (CGT) when it is sold.
There are also certain absences that are treated as ‘deemed occupation’ and do not trigger CGT. This is when the owner is physically absent yet is treated as if living there for the purposes of the relief, as long as the period of absence is preceded and followed by actual, physical occupation.
The last 9 months of ownership are always treated as deemed occupation, regardless of whether or not the owner is present, provided that the owner has occupied the property at some point throughout the period of ownership.
Principal Private Residence (“PPR”) relief on the disposal of a UK residential property is not available to non-resident individuals unless either:
- The person making the disposal was living in the UK for that tax year, or
- The individual, his spouse or civil partner stayed overnight in the property for at least 90 times in that tax year.
Where the individual only owned the property for part of a tax year, the 90 days are time apportioned over the period of ownership for that year. If the 90-day rule is not met for that year, then the individual is treated as away from the property for that tax year.
PPR is also available to trustees of an overseas trust if the beneficiary is a non-UK resident who meets the 90 day rule.
Non-resident individuals will be able to make an election for private residence relief in restricted circumstances.
INHERITANCE TAX ON UK REAL ESTATE
The property will potentially be subject to Inheritance Tax (IHT) in the event of the owner passing away. IHT is payable at 40% to the extent the value of the property (and any other chargeable assets) exceeds the nil-rate band (which is currently £325,000 per person) and subject to any other available exemptions and allowances. Debts secured against the property are generally deductible when considering the taxable value.
Liability to UK inheritance tax “IHT” turns not on residence but on domicile.
An individual is subject to IHT on his/her worldwide assets if s/he is domiciled in the UK, irrespective of where that individual was resident at the time of their death.
If an individual has a foreign domicile, liability is restricted to UK situs assets, including real estate, net of any allowable deduction for debts. Again, this applies irrespective of that individual’s residence position at the time of their death.
With regard to commercial property, the simplest way for non-doms and offshore trusts to avoid exposure to IHT is to hold the UK assets through offshore holding companies.
Where residential real estate is concerned, corporate ownership is not always the best option as the impact of ATED and NRCGT will also need to be considered. Additionally, the company will not shelter the IHT liability for residential property.
Investors in UK residential property should instead consider the use of loans or life insurance to mitigate any potential IHT liabilities. The effectiveness of existing corporate structures as IHT shelters should also be reviewed.