Five days of International tax Tips: Property
Here, she covers her advice on international tax with regards to property.
Evaluating the appropriate structure to own/invest in UK property
The first crucial step when considering to purchase a UK property is to establish the best structure through which to own such property – whether it’s in individual names, joint names, via a UK company, via an offshore company, via an offshore trust or via any other structure. There is no one size fits all scenario and establishing the most optimal structure will entirely depend on your short, medium and long-term goals and aspirations.
We work with our clients to understand their personal and business goals to then propose and suggest tax efficient property ownership structures. For example, the ideal structure will depend on whether you have succession planning in mind, development plans, long-term investment plans or any other plans. However, one needs to be aware of the ever-changing legislation in respect of UK real estate especially when properties are held by non-resident individuals, trusts or companies. Consideration given to financing is also important and this will also play an important role when evaluating the appropriate structure along with confidentiality as to what is maintained on public registers and requirements.
Tax implications when purchasing a UK property
It is important to understand the various tax effects when purchasing UK property. For instance, one needs to consider Stamp Duty Land Tax (SDLT) as different rates apply when purchasing via a company as opposed to an individual name, and when purchasing commercial property vs residential property.
Furthermore, a 2% surcharge on SDLT was introduced from 1 April 2021 for non-resident buyers of residential property in England and Northern Ireland. The surcharge could also apply to certain UK resident companies that are controlled by non-UK residents.
Consideration should also be given to another tax called the Annual Tax on Enveloped Dwellings (ATED) which applies to companies which own UK residential properties worth more than £500,000. There are exemptions that companies can claim provided certain conditions are met and these should be looked at carefully. In order to claim such exemptions, ATED relief returns should still be filed.
Tax on Non-resident landlords
Non-resident landlords are subject to UK tax on UK rental profits at rates of up to 45%. Holding UK rental properties (residential or commercial) through an offshore company can reduce the rate of tax on UK rental profits to 19%. Furthermore, rents received by non-UK resident landlords are subject to 20% withholding tax unless an application is made to HMRC under the non-resident landlord scheme for rents to be paid gross. The 20% withholding does not discharge the non-resident’s tax liability if they are subject to tax at 45%, rather it is used as a credit against their tax liability. Therefore, understanding the obligations for non-resident landlords, when they need to register with HMRC, when tax returns should be filed, under what tax regime such non-residents would fall under and how rents are collected by managing agents is very important.
Disposal of UK properties
Gains on disposals of residential property may be subject to UK capital gain tax (CGT), corporation tax (CT) or non-resident capital gains tax (NRCGT) (or a combination of these). Many changes have been introduced in recent years in respect of the rate that could be applied, the valuation date that should be used when calculating the gain, the reporting and payment requirements and deadlines. To give you an example, tax rates could vary from 18% or 28% for non-resident individuals to 28% for non-resident trustees to 19% for non-resident companies. Therefore, it is vital that proper advice is taken in order to avoid unnecessary penalties.
It is also important to understand the UK tax implications arising when disposing of an interest in property rich vehicles (i.e. companies, trusts, etc) which derive their value directly or indirectly from UK land and property. Additional compliance and tax charges falling within the realm of capital gains tax or corporation tax could arise unless statutory exemptions apply. Therefore, it is important to assess the existing investment portfolio and have a good understanding of the assets base of any prospective investments.
UK inheritance tax on ownership of UK property
UK inheritance tax (IHT) applies to UK assets which are directly owned, regardless of the residence or domicile status of the owner. IHT is chargeable on death at 40% in relation to assets held in the estate.
Prior to 6 April 2017, owning UK residential property through a non-UK company provided an effective IHT shelter for individuals who were not deemed to be domiciled in the UK. This is no longer effective from 6 April 2017 where a UK residential property is owned by a non-UK company directly or indirectly. Under these new rules, the value of the shares attributable to the UK residential property falls within the scope of IHT. Similarly, transfers of UK property into trust attract a 20% IHT charge and the UK assets will broadly be subject to a 6% IHT charge every 10 years, and a pro-rated 6% IHT charge on any distributions from the trust. There are quite a few details surrounding this topic and therefore expert advice is highly recommended.
For further information and advice on any of the above, speak to our International Tax team today.