Real Estate

Investing in UK residential property

Andrew Lee, Haines Watts

In recent years, we have seen a steady growth of overseas individuals investing in the UK residential property market particularly around London and the South East of England. Traditionally, the UK has been a hotspot for wealthy overseas property investors from North America, Southeast Asia, Japan and the Middle East and now Russian and Chinese investors are joining the ranks. This is not surprising, as the UK has always been popular for its liberal legal and tax regime and it has long been recognised as one of the most stable democracies in the world. London properties in particular have a long history of attracting investments from wealthy individuals from all corners of the world. The attractions of London include its world class educational, cultural and sporting and leisure facilities.

This article provides some legal and tax information for overseas investors (making purchases directly as individuals or through a non-UK resident corporate vehicle) considering buying residential property in England and Wales (there are some subtle differences in property law between England and Scotland) for investment purposes.

The two most important forms of property ownership in England and Wales are “freehold” and “leasehold”.  

  • Freehold is where the entire property (both the building and land) is owned by the investor. This gives the owner most control. However, it should be noted that freehold ownership may still be subject to certain covenants, for example, restricting changes that may be made to the property.
  • Leasehold is where the leaseholder’s ownership of the land is contractually limited in time to the length of the term of the lease. At the end of the lease the property becomes the possession of the freeholder. Many leases are originally granted for up to 999 years, but existing leases on properties are usually shorter.   

Despite the attractiveness of the UK residential property market, the complexity of UK tax laws means that adequate planning is essential. There are some key UK tax considerations that are relevant to overseas investors considering investing in UK residential property.

The UK tax position for those investors who trade in UK property is very different to that outlined below and is not discussed in this article. The considerations listed here are by no means an exhaustive list and investors should take independent professional advice on any particular transaction including home country tax considerations.

Stamp Duty Land Tax (SDLT)

SDLT is chargeable on the purchase of all UK properties. SDLT is payable by the purchaser. Current SDLT rates for residential property are as follows:

Purchase price

SDLT rate

Up to £125,000

Zero

Over £125,000 to £250,000

1%

Over £250,000 to £500,000

3%

Over £500,000 to £1million

4%

Over £1million to £2million

5%

Over £2million

7%



A higher SDLT rate of 15% applies to corporate bodies acquiring UK residential properties where the purchase consideration exceeds £500,000. There are reliefs available for genuine property businesses (e.g. property letting or development) and there is a clawback of relief if the conditions for the relief are breached within three years of the date of the transaction.

Income tax

Non-UK resident landlords who derive profits from rental receipts in respect of UK properties are taxable in the UK. Non-UK resident individual owners of UK properties are subject to tax at between 20% and 45% on the net rental income. Non-UK resident companies (providing that they are not carrying on a trade through a UK branch or agency) holding UK properties as an investment are subject to tax at a rate of 20%.  

The UK operates a system for withholding tax from rental receipts; tenants or letting agents (as appropriate) are generally required to withhold UK income tax at the 20% basic rate from the gross rent before it is paid to the non-resident landlord. Non-resident landlords can register with HM Revenue & Customs (“HMRC”) and file tax returns each year declaring any UK rental income; this permits them to claim a deduction for eligible expenses against their income which could reduce their actual tax liability. Interest payable on loans used to buy property which is incurred wholly and exclusively for rental business purposes is generally deductible but this is subject to anti-avoidance tax rules particularly where there are connected party borrowings and where interest is payable overseas. Any withholding tax deducted by the tenant or letting agent can be offset against the non-resident landlord’s tax liability and may result in a repayment of tax.

Subject to satisfying certain conditions, it is possible for non-resident landlords to apply to HMRC for approval to receive rental income gross (i.e. no withholding tax). If successful, HMRC will issue a notice to the tenant or letting agent authorising them to pay rental income to the non-resident landlord without deducting UK tax.

Annual Tax on Enveloped Dwellings (ATED charge)

From 1 April 2013 both resident and non-resident companies owning UK residential property worth more than £2million have been required to pay an annual ATED charge, which is based on a sliding scale according to the market value of the property as follows:

Property value

Annual chargeable amount 2014/15

Over £2million to £5million

£15,400

Over £5million to £10million

£35,900

Over £10million to £20million

£71,850

Over £20million

£143,750


For valuation purposes, the property value is the market value at 1 April 2012 or the date of acquisition, if later. There are certain exemptions, for example residential properties acquired and held for the purpose of rental to third parties on a commercial basis. Generally, properties that are acquired and held through companies for personal or family occupation will be caught.

Two new ATED bands will be introduced over the next two years. From 1 April 2015 properties valued at over £1million but not over £2million will be caught and will pay an annual ATED charge of £7,000. From 1 April 2016 properties valued at over £500,000 but not over £1million will need to pay an annual ATED charge of £3,500.  

Capital Gains Tax (CGT)

Historically, non-UK resident owners of investment residential property were exempt from UK tax on gains arising from the disposal of the property. But the tax law relating to UK capital gains tax for non-UK tax resident owners is in a state of flux and some fundamental changes have taken place.

From 6 April 2013 non-UK resident companies are liable to UK tax on gains arising from the disposal of UK investment residential property if the property has been subject to the ATED charge during its period of ownership. As with the ATED charge, certain properties including residential properties acquired and held for the purpose of rental to third parties on a commercial basis (i.e. buy-to-let properties) are exempt from the ATED-related CGT charge. The CGT charge on ATED-related gains is 28% and is restricted to the sale of residential property worth over £2million (the same threshold for ATED charge). This threshold will be reduced to £1million from 1 April 2015 and to £500,000 from 1 April 2016 in line with the ATED charges.

The UK government announced in its 2014 Budget that they will extend the CGT charge to non-UK tax residents (both individuals and companies) for growth in value in UK residential property (when the property is transferred/disposed of) from 6 April 2015. A government consultation on the matter has been concluded but no further details have yet been announced.   

Inheritance tax (IHT)

Individual investors who own UK properties in their own name will, in the event of death, be subject to IHT regardless of their domicile or residence. In simple terms, even if an individual investor has never been resident in the UK, IHT will be payable (at 40%) in respect of the individual’s UK assets on death. Exemptions may apply, for example, where the property is passed to a surviving spouse or charity. Subject to anti-avoidance tax rules, borrowings used for financing the acquisition of UK property could potentially reduce the value chargeable to IHT.

If a non-UK domiciled individual owns shares in a non-UK resident offshore company (which in turn owns a UK property) the shares in the offshore company will be excluded from UK IHT as “excluded property”. This has made corporate holding structures attractive in the past, especially when combined with trust ownership of the company’s shares. However, the recent tax increases described in this article now mean that it is even more important that each case is evaluated on its own merits. It is no longer the case that there is a straightforward answer to the question “how best to hold UK residential property?” The answer is now more finely balanced and with so many variables, the advice of professionals is often invaluable.


Andrew Lee, Director
Haines Watts, over 60 offices throughout the United Kindom
E: This email address is being protected from spambots. You need JavaScript enabled to view it.; Web: www.hwca.com

 

 

 

 

 


published: November 2014

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