UK Tax on UK residential property investments

This note summarises the UK tax charges that apply on a UK residential property investment. It is written on the basis that the investor is resident outside the UK for tax purposes and is domiciled outside the UK.

This note is by its nature a generalisation of the tax charges applying.  It cannot be taken as a substitute for specific tax advice which should be taken in all cases based on the specific circumstances of the investment being made and the specific tax position of the investor.  In particular, all non UK investors should take advice on the tax position in their home country from making an investment in UK residential property. Relief under an appropriate Double Tax Treaty may apply to reduce the taxes set out below.

INVESTMENTS IN PERSONAL NAME 

A.    Tax charges on Acquisition

1. Stamp Duty Land Tax (SDLT)

This is a flat rate tax based on the consideration paid:

• 0% – £0 to £125,000
• 1% – £125,001 to £250,000
• 3% – £250,001 to £500,000
• 4% – £500,001 to £1,000,000
• 5% – £1,000,001 to £2,000,000
• 7% – over £2,000,000

B.    Tax charges on Ownership / Rental Income

1. Council Tax

Annual tax paid to local authority to pay for local services. Varies depending on location and the value of the property but can be as much as £3,000. Paid by tenant if the property is let.

2. Income Tax

Annual tax paid on any profit made from letting. 20% rate (although certain individuals from certain countries will have a £10,000 tax free threshold).

3. Inheritance Tax (IHT)

Payable at 40% on value of UK situated property in excess of £325,000 at death of owner (or on property gifted in 7 years before death). £650,000 threshold if jointly owned by husband and wife.

C.    Tax charges on Selling

1. Capital Gains Tax (now)

There is no capital gains tax when a non UK resident sells a UK investment property at a profit.

2.  Capital Gains Tax (from 6 April 2015)

There will be a new capital gains tax charge effective from 6 April 2015 when a non UK resident sells a UK residential property.  Details are not yet available.

The tax charges outlined above are relatively benign when compared to most other European countries.  However, the potential IHT charge on very valuable properties can lead to the conclusion that a non UK based company should be used as the vehicle to acquire the UK residential investment property.

If a non UK company is used, the tax charges will be as set out below.

INVESTMENTS IN COMPANY NAME

A.    Tax charges on Acquisition

1. Stamp Duty Land Tax (SDLT)

This is a flat rate tax based on the consideration paid:

• 0% – £0 to £125,000
• 1% – £125,001 to £250,000
• 3% – £250,001 to £500,000
• 15% – over £500,000

The 15% rate can be reduced to 7% is certain circumstances.

B.    Tax charges on Ownership / Rental Income

1. Council Tax

Annual tax paid to local authority to pay for local services. Varies depending on location and the value of the property but can be as much as £3,000.  Paid by tenant if the property is let.

2. Corporation Tax

Annual tax paid on any profit made from letting – 20% rate.

3. Inheritance Tax (IHT)

No IHT because the asset owned by the individual is a share-holding in a non-UK company so no valuable UK situated assets are owned.

4. Annual Tax on Enveloped Dwellings (ATED)

The ATED currently applies as an annual tax depending on the property value. The rates for the 2014/15 tax year are:

• Value – less than £2,000,000 – nil
• Value – £2,000,000 to £5,000,000 – £15,400 tax charge
• Value – £5,000,000 to £10,000,000 – £35,900 tax charge
• Value – £10,000,000 to £20,000,000 – £70,850 tax charge
• Value – over £20,000,000 – £143,750 tax charge

From 1 April 2015, there will be a new £7,000 charge on properties between £1,000,000 and £2,000,000.

From 1 April 2016, there will be a new £3,500 charge on properties between £500,000 and £1,000,000.

The ATED does not apply if the property is let on commercial terms to a third party.

C.    Tax charges on Selling

1. Capital Gains Tax (now)

There is no capital gains tax when a non UK resident company sells a UK investment property at a profit unless the property is in the ATED rules in which case a 28% CGT charge applies from 6 April 2013.

2. Capital Gains Tax (from 6 April 2015)

There will be a new capital gains tax charge effective from 6 April 2015 when a non UK resident sells a UK residential property. Details are not yet available.

In some cases, direct personal ownership or ownership through a non-UK company are not considered appropriate and a non UK based trust is used as the ownership vehicle. Specific advice should be taken on the tax consequences that will flow from using a non UK situated trust.