The UK residential property market has for a long time been an attractive proposition for foreign investors. An increased demand for UK residential property from abroad runs contrary to both the Scottish and UK Governments’ objectives to slow down the property market and encourage wider property ownership. The UK property tax system is in a state of flux with UK residential property investors having to cope currently with unprecedented changes to the tax treatment of residential property.
A number of these property related tax measures are aimed at the tax treatment for UK residential property held by non-UK residents either directly or indirectly through a family company, trust or alternative ownership vehicle. It is therefore important for foreign investors to consider the implications of the UK property tax rules currently in force and also look ahead to the potential impact of proposed changes to the tax rules that are now looming large on the horizon.
This article highlights certain aspects of the UK residential property tax system that are of particular relevance to non-UK residents who currently own or are looking to invest in UK residential property:
1. Land and Buildings Transaction Tax (LBTT)/Stamp Duty Land Tax (SDLT)
LBTT (property situated in Scotland) and SDLT (property situated in England and Northern Ireland) is chargeable on the acquisition of residential property. LBTT and SDLT are progressive taxes with slices of the consideration being subject to tax at different rates. The LBTT or SDLT charge is calculated on the amount payable in money or money’s worth (including any VAT element) and is chargeable whether or not the purchaser is resident in the UK.
|LBTT (Scotland)||SDLT (England & NI)|
|Up to £145,000||Nil||Up to £125,000||Nil|
|£145,001 - £250,000||2%||£125,001 - £250,000||2%|
|£250,001 - £325,000||5%||£250,001 - £925,000||5%|
|£325,001 - £750,000||10%||£925,001 - £1,500,000||10%|
|Over £750,000||12%||Over £1,500,000||12%|
There are a number of potential exemptions and reliefs from both LBTT and SDLT.
Property purchased in Wales is subject to a separate Land Transaction Tax.
2. Supplementary LBTT/SDLT charge
A supplementary LBTT/SDLT charge applies on the acquisition of “additional residential properties” on transactions with a value over £40,000 taking place on or after 1 April 2016.
The LBTT additional dwellings supplement (‘ADS’) charge was increased from 3% to 4% from 25 January 2019. The SDLT ADS charge remains at 3%. The UK Government has published a consultation on the introduction of a new SDLT surcharge of 1% for non-UK residents purchasing residential property in England and Northern Ireland. This would be in addition to the SDLT ADS charge.
The purchase of, say, buy-to-let properties, holiday homes or student accommodation for children will potentially be caught by the supplementary charge. The supplementary charge applies to non-UK residents even if they own no other property in the UK.
The supplementary charge is levied in addition to the normal rates of LBTT/SDLT applied to the purchase price. There would, for example, be an additional £8,000 LBTT charge on the purchase of a buy-to-let property in Scotland for £200,000 where an individual already owns an interest in their family home.
3. SDLT threshold on purchases by a company (1 April 2016)
A 15% SDLT charge potentially applies to companies (and certain other corporate vehicles) purchasing residential property situated in England and Northern Ireland with a value in excess of £500,000. This SDLT charge was introduced by the UK Government with effect from 1 April 2013 as one of three new tax charges designed to discourage individuals from holding high value residential property for their own personal use through companies (please see 5. and 10. below). It applies to both UK and offshore corporate vehicles.
This tax regime originally only applied to residential properties with a value in excess of £2 million. This threshold was subsequently reduced to £1 million from 1 April 2015. The lower threshold of £500,000 has resulted in a far greater number of companies being subject to this tax regime. There are tax reliefs available for genuine commercial businesses acquiring residential property, including, for example, property letting, trading in or redeveloping property and for certain types of employee accommodation.
4. Non-resident landlords scheme
Non-UK residents will potentially be subject to UK income tax on their net income arising from the renting out of property situated in the UK. The non-resident landlords scheme (‘NRLS’) was introduced by HMRC to facilitate the collection of UK income tax from non-UK residents.
NRLS operates by the non-UK resident’s agent or the tenant deducting basic rate (20%) income tax from the rent and paying it across to HMRC at the end of every quarter. A non-UK resident can, however, apply to HMRC to receive their rental income gross.
A non-UK resident will require to report their taxable rental income to HMRC on their UK self-assessment tax return with any income tax being payable by 31 January following the end of the tax year.
5. Increase in annual charge for companies owning residential property (1 April 2018)
An annual tax on enveloped dwellings (‘ATED’) was introduced by the UK Government from 1 April 2013 as part of its package of tax measures targeting companies holding interests in high value residential property situated in the UK (please see 2. above). The Government’s net has gradually widened with the value of residential property now being potentially caught by ATED reducing from £2 million to just £500,000.
The level of the potential ATED charge will depend upon the market value of the residential property held in the company as at 1 April 2017. Previously, it was the market value of the property at 1 April 2012, but this has been updated for calculating the ATED charge for the 2018/19 period. It was announced at the UK Autumn Budget in November 2017 that ATED annual charges will increase by 3%. Companies holding a residential property with a market value of between, say, £500,000 and £1 million will now be facing an ATED charge of £3,600 each year.
An ATED return will have to be filed with HMRC every year even if the company qualifies for one of the tax reliefs available for holding certain types of residential property. This reporting requirement could now potentially catch farmhouses and employee accommodation held in genuine farming or estate companies.
6. Restrictions to income tax interest relief (6 April 2017)
Up until 6 April 2017 landlords could claim a full income tax deduction for allowable finance costs (e.g. mortgage loan interest, arrangement fees, repayment fees, etc..) relating to buy-to-let residential property. A higher rate (40%) tax payer with annual mortgage interest of £10,000 on their buy-to-let property could, therefore, receive income tax relief of up to £4,000 (£10,000 @ 40%) each year.
The Government introduced new rules from 6 April 2017 restricting the tax relief on all allowable finance costs to the basic rate of income tax (currently 20%) for landlords of residential property by 6 April 2021. The new rules will be phased in over 4 years. Three-quarters of all allowable finance costs will be subject to the restriction in the 2019/20 tax year. These restrictions apply to individuals, partnerships and trusts, and apply equally to residential property situated in the UK and worldwide.
7. Inheritance tax
Inheritance tax (IHT) is a tax on the net value of the capital in an individual’s estate at the time of their death and which they have gifted within 7 years of their death. The value of an individual’s estate in excess of the available IHT nil rate band (currently up to £325,000) will potentially be subject to IHT at up to 40%, subject to the availability of certain reliefs and exemptions.
Where an individual is domiciled in the UK the value of their worldwide assets will form part of their estate for UK IHT. Where an individual is non-UK domiciled it will only be the value of their assets situated in the UK that will form part of their estate for UK IHT. The value of UK land and property interests held personally by a non-UK resident will therefore potentially be subject to UK IHT.
8. Extension of the UK IHT regime to indirectly held property (6 April 2017)
The Government introduced legislation with effect from 6 April 2017 to bring the value of UK residential property held indirectly (e.g. by a company or trust) into the IHT regime. The measure is designed to target non-UK domiciles who indirectly own UK residential property through company and/or trust structures, which were not previously subject to UK IHT. The actual impact of this legislation should therefore be relatively small in practice.
9. Sale by non-UK residents (6 April 2015)
The UK capital gains tax (‘CGT’) regime was extended to cover capital gains arising on the disposal of UK residential property by non-UK residents with effect from 6 April 2015. No UK CGT was previously payable by non-UK residents on the sale of UK property.
The new CGT regime applies to capital gains arising on the disposal of all residential properties, regardless of value, by non-UK residents. Only the proportion of any capital gains attributable to the period after 5 April 2015 will be potentially subject to UK CGT.
The disposal requires to be reported and any CGT arising settled within 30 days of the sale. The only exception to this rule is where the non-UK resident has taxable income and/or other capital gains that require to be reported on a UK tax return. If this is the case, the UK CGT will be payable by 31 January following the end of the tax year in which the disposal took place.
From 6 April 2019 non-UK residents will become subject to UK CGT on the disposal of all UK land and property.
10. Abolition of CGT for companies selling residential property (6 April 2019)
Companies caught in the ATED regime (please see 2. and 5. above) were previously subject to a 28% CGT charge on capital gains arising on the disposal of residential property situated in the UK with a market value in excess of £500,000.
The extension of non-UK resident CGT to cover all post 5 April 2019 UK property disposals (please see 9. above) has resulted in the abolition of this ATED CGT charge from the start of the 2019/20 tax year onwards.
It is always important to consider the UK tax implications on the acquisition, ownership and disposal of any interest in property situated in the UK. Simple and effective advice given at the earliest opportunity can help ensure non-UK residents minimise their tax exposure and protect their interests while maximising the benefits of property ownership.
Anderson Strathern has an experienced team of tax and property specialists who are able to provide you with practical, commercial and tax-effective solutions to help safely guide you through this ever changing landscape.