What are the tax implications for foreign investors to UK Property
Even if you are a non-UK resident or a non-UK domicile investing in UK property, there may still be tax implications you need to understand. It is recommended that all investors in to UK property should take tax advice.
Stamp Duty Land Tax
Commonly known as stamp duty or stamp duty land tax, this is a transaction tax which is payable on the purchase on UK property. There is a tiered rate payable, depending on the purchase price of your UK property, and rates differ if you are buying your first home or if you are buying through a company rather than as an individual. The rate for residential property can range from zero to 15% for purchases above £500,000 by companies.
Equally, higher rates may be payable for those purchasing an additional property.
For most investors buying from abroad, the investment objective is to rent the property to tenants to generate an income or a return. If the property is rented, then the owner will pay income tax on the net profits of the rental returns. The rate of income tax payable will depend on the individuals income tax rate which is determined by the level of income achieved in the UK. The maximum rate if income tax is 45%, which is payable on income over £150,000, however, many pay rates of 20% and 40%.
In order to calculate the net profit of a rental return, there are certain deductible expenses such as management fees, mortgage interest (although this is being reduced) and replacing furniture.
Non-UK residents can benefit from renting out a property on a commercial basis through a company, as the returns would be taxed as corporation tax, rather than income tax, and would therefore be capped at 20% (potentially reducing in 2020), while full mortgage interest relief would be available. However, the costs of company management and ownership should be considered.
Otherwise known as Annual Tax on Enveloped Dwellings is levied on companies that hold UK residential property with a value over £500,000 and are not let on a commercial basis. Thus, it does not apply if a property is held or owned by one or more individuals.
The amount payable is calculated by the value of the underlying property, and reliefs can be considered for those companies who carry out commercial activies.
Capital Gains Tax
Many investors who purchase UK property do so in order to achieve a return on their capital investment by selling the property for a profit on the original amount paid.
Investors who are non-UK residents and were not a UK tax resident at any time over the most recent six tax years, will have to pay CGT on the portion of any gain made after April 5, 2015, when they sell the property. The taxable gain will be established by taking the sale value from the purchase price.
If the gross taxable gains and income are above the income tax basic rate band then CGT will be chargeable at 28%. If they are below the basic rate band, then CGT will be chargeable at 18%. The chargeable rate for trustees is also 28%.
Tax payers have an annual CGT allowance (in 2019/2020 tax year, this allowance is £12,000) on which no CGT is chargeable. Any CGT would only be charged on gains above this amount, however, it should be noted that investors should consider all gains made within the UK.
If the property is owned by a non-UK company then CGT will be charged on the gain during the period that the property was subject to Ated at 28%, while days when the property was not subject to Ated will be removed from the liability. As such, tax can be payable from April 2013 onwards in some instances.
Inheritance Tax is payable on the death of an individual in the UK. It is chargeable at 40% on the entire value of the assets, not just the gain, with an allowance of £325,000 per person (in some limited circumstances, this may increase to £500,000 from 2020).
For those investors who are not domiciled in the UK, IHT will only apply to directly held UK assets. Those holding UK residential property through a non-UK company will also be now be included in the IHT net, whether the investor owns the property directly, through a company as a shareholder or through a loan to a non-UK company. If shares or property are owned within a trust, the situation becomes more complex, however, it is likely that IHT will still apply.
IHT is often considered an optional tax and there are many effective planning strategies that can mitigate IHT in association with a knowledgeable adviser. For example, a property can be passed to a spouse free of IHT when it is structured in the correct manner or additionally life insurance is commonly used to overcome an IHT bill.
While there are a range of different tax considerations for those investing in UK property, the UK tax system is simple to navigate and competitive, while effective planning can make use of allowances to minimise the impact against returns.
Always be sure to take specialist advice from professionals as every situation is different and everyone will require a strategy specific to themselves.