Foreign investors have for many years found that the UK property market and, in particular, the London property market, offers attractive investment opportunities. However, consideration must be given to the proper structuring of the purchase to minimize the potential liability to UK tax and advice taken as to any potential liability to tax in the home jurisdiction.
We consider below the effect of direct ownership vs ownership through a non-UK corporate entity and the principal tax implications of each.
What are the UK tax consequences for an individual owner holding in their own name?
A non-UK resident individual who owns UK residential property will need to give consideration to the tax on the income generated from any letting of the property, potential capital gains tax on disposal and inheritance tax.
Income tax: If the property is let, the individual owner will be subject to UK income tax on the profit generated by the letting. The non-resident overseas owner is required to register with the tax authorities, the HMRC, under the Non-Resident Landlord Scheme. Under the Scheme application may be made to HMRC which if granted, will enable the owner to receive the rent gross, providing that a UK tax return is filed, tax due is paid on time and the individual’s UK tax affairs are in order. Otherwise, the 20% basic rate tax must be withheld by the letting agent or tenant; the owner then receiving the rent net of tax.
The tax rate starts at the basic rate of income tax of 20% and rises to a top rate of 45%, depending on the level of profit.
Capital Gains Tax: From 6 April 2015 (1) capital gains on the sale of UK residential property owned by non-residents are subject to tax, regardless of whether the property is owner occupied or let to tenants.
The tax will be levied only on gains accruing after 6 April 2015 or the date of a later purchase. It is not the intention to tax historic gains or for the tax to have retrospective effect. Relief may be available for the individual’s only or main residence, subject to certain restrictions.
The charge to tax will depend on the level of the individual’s UK source income in the year of sale, subject to an annual exempt amount which is applicable to UK residents and non-residents alike. The rate of tax ranges from a starting point of 18% to a 28% top rate.
Inheritance Tax: On the death of the individual property owner, even though non-UK resident, all assets situated in the UK, which will include UK residential property, will be subject to UK inheritance tax.
Tax is levied at the rate of 40% above the threshold of £325,000, subject to certain limited exemptions. For high value properties this can result in a significant tax charge.
What are the tax consequences for a non-UK resident company?
ATED and ATED related CGT: If the property is held through a company or a similar structure and has a value of £500,000 or more on 1 April 2012 the company will be subject to the Annual Tax on Enveloped Dwellings or ATED. There are exemptions, for example, if the property is let on a commercial basis to a third party. The tax is levied in four bands starting at a value of £500,000 with properties falling in the top band valued £20m and above.
Where a company is liable to pay ATED, it will also be within the scope of the ATED capital gains tax charge on the sale of the property. The tax will be on any gain arising after 6 April 2015 or the date of a later purchase, and will apply to companies, trusts and similar structures.
When considering ATED and the related CGT charge on sale, there appears to be little to commend ownership through a non-resident corporate entity, however, it would be premature to dismiss ownership through an offshore corporate as an effective tax planning tool.
Corporation Tax: Rental income received by a non-resident company will be subject to UK corporate tax at the 20% flat rate, which can be attractive when investing in high value properties which generate high levels of rental income.
Inheritance tax: The death of an individual, who holds shares in a non-UK resident company which owns UK residential property, will not trigger a charge to UK inheritance tax for an individual who is not domiciled in the UK, thus representing a possible significant saving of tax in the UK.
It can be seen from this brief note, that while the tax regime has become more complex in recent years, investment in UK real estate remains an attractive proposition, providing the investment is made with careful consideration and implementation of an appropriate structure to take advantage of the remaining tax planning opportunities.
Further legislation can be expected in the coming months following statements by Mr Cameron concerning the public record of foreign property ownership. These statements were made during the May 2016 London Anti-Corruption Summit as reported on the following link: http://www.rosemont-int.com/news/18-05-2016-london-anti-corruption-summit-may-2016/
On 5 April 2017 the UK Government published a consultation ("call for evidence") on proposals for a new beneficial ownership register for overseas companies and other legal entities owning UK real estate.
This summary is provided as general information of broad interest to readers. It does not constitute and is not intended to offer legal or tax advice and must not be relied upon as such. Professional advice should be sought on your specific circumstances before taking or refraining from action.
(1) subject to enacting legislation