Tax implications for non-UK residents/non-UK domiciliaries owning UK property

London has a particular attraction for overseas investors seeking to buy property. The UK taxation landscape has however changed significantly in the last couple of years and investors should consider carefully how each of the various taxes might impact on them and whether they should buy as an individual or through a corporate or other structure.

Corporate or individual ownership?

In the past the standard advice for a non-UK resident/ non-UK domiciliary has been to own UK property through a non-UK resident company for either or both of the following reasons:

On purchase, Stamp Duty at only  0.5% of the purchase price was payable on the shares rather than SDLT at much higher rates and

For Inheritance Tax (IHT) purposes the asset owned would not be a UK property, but shares in a non-UK resident company which would be outside the scope of IHT provided the individual was not UK domiciled. Invariably an offshore trust was also used to hold the shares in the company to protect the position if the individual became UK deemed domiciled for IHT purposes.

Whilst the above advantages still apply, these have to weighed against: a higher rate of SDLT for a company to acquire a high value residential property and an annual tax charge (ATED) for such properties. Whether ownership of a UK property should be through an offshore corporate vehicle or owned directly depends very much on the personal circumstances of the individual and prospective investors are advised to seek professional advice.

Stamp Duty land Tax (SDLT)

SDLT is payable when you buy UK property costing more than £125,000. SDLT is payable as a percentage of the cost of the property and the rate depends on whether it is bought through a company or not:

Buy through a company Buy as an individual
£125,001 - £250,000 1% 1%
£250,001 - £500,000 3% 3%
£500,001 or more 15% /
£500,001 - £1,000,000 / 4%
£1,000,001 - £2,000,000 / 5%
£2,000,001 or more / 7%

If the purchase is for a genuine property business, the lower rates (as for individuals) will apply.

If the property is already owned by a company and you buy the shares in that company, instead of paying SDLT, you would pay Stamp Duty at only 0.5% of the value.

Annual Tax on Enveloped Dwellings (ATED)

Since 6th April 2013 an annual tax has been imposed on high value properties which are owned by non- natural persons (generally companies) unless an exemption applies. High value currently means more than £2m but from April 2015 it will mean more than £1m and from April 2016 more than £500,000.

The ATED charges for 2014/15 are as follows:

Value of property ATED charge
£2,000,001 - £5,000,000 £15,400
£5,000,001 - £10,000,000 £35,900
£10,000,001 – £20,000,000 £71,850
£20,000,001 and over £143,750

Exemption is available for properties which are let throughout the year on a commercial basis to unconnected parties.

Capital Gains Tax – ATED related

Where a company sells a property for more than its original cost and that property has given rise to ATED charges, the company is liable to 28% capital gains tax on the gain arising, whether or not the company is UK resident. This is a significant departure from the long standing rule which until 5th April 2013 meant that non-residents (corporate or otherwise) were not liable to UK capital gains tax.

On the other hand if a non-UK resident sells shares in a company which owns a UK property, the gain on the shares is non-taxable.

Capital Gains Tax – proposals

In addition to the ATED related capital gains regime mentioned above, there are proposals to tax all gains arising after 5th April 2015 from the disposal of UK residential property owned by non-UK residents. It is intended that unlike for SDLT and ATED, there would be no exemption for commercially let properties. It is not yet clear how this latest proposal would interact with the existing ATED related CGT.

A UK resident individual who owns and occupies a UK property as his main residence throughout the period of ownership is exempt from CGT if he sells it for more than he paid for it. This exemption is only likely to be available to non-UK residents in exceptional circumstances. However if the non-UK resident were to set up a trust which allowed another family member to occupy the property and he or she did so, CGT exemption may still be available on any gain realised.

Income tax

If a UK property is let, the net rental income is subject to UK income tax whether owned by an individual or a non-UK resident company. Net rental income means gross rent less allowable expenses such as loan interest, letting agent’s fees etc.

Loans using certain offshore collateral

Non-UK domiciled individuals considering using overseas income or gains as collateral for loans used to buy UK property need to consider a recent change of view by HMRC which could result in double taxation: both of the amounts used to pay interest and capital as well as the loan facility.

Mansion tax -proposal

The Liberal Democrats and Labour have suggested that, if they were to come to power, they would introduce a Mansion tax on properties worth over £2m.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.