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 on their UK property interests.
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 & Northern Ireland)|
|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%|
* An extension of the nil rate band to the first £500,000 applies where the property is acquired before 1 July 2021. This is reduced to £250,000 where the property is acquired between 1 July and 30 September 2021 before falling to £125,000 from 1 October 2021.
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 supplementary charge is levied in addition to the normal rates of LBTT/SDLT applied to the purchase price.
The LBTT additional dwellings supplement (‘ADS’) charge was increased from 3% to 4% from 25 January 2019. The SDLT ADS charge remains at 3%. A new SDLT surcharge of 2% applies to non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021. This is in addition to any 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.
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.
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
The non-resident landlords scheme (‘NRLS’) was introduced by HMRC to facilitate the collection of UK income tax from non-UK residents with UK residential property.
Individual 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. 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.
An individual 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.
From 6 April 2020 rental income received by non-UK resident companies under the NRLS has been subject to corporation tax (2020/21 – 19%) with any corporation tax being payable 9 months after the company’s year-end. From 6 April 2023 the rate of corporation tax will increase to 25% on the rental income of all non-resident companies regardless of size.
5. Annual charge for companies owning residential property
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. 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 £3,700 each year.
An ATED return has 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. The filing and payment deadline for the chargeable period from 1 April 2021 to 31 March 2022 was 30 April 2021.
The valuation date is on a 5 year rolling basis with next valuation date being 1 April 2022. This date will be relevant for the chargeable period from 1 April 2022 to 31 March 2023 and valuations should be instructed in time for the return due to be filed by 30 April 2022.
6. Restrictions to income tax interest relief
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 for landlords. The rules were phased in over 4 years and income tax relief was restricted to the basic rate of income tax (20%) with effect from the start of the 2020/21 tax year.
See further information in our residential property lettings - it's a taxing time for landlords article.
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 (frozen at £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
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.
9. Sale by non-UK residents
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 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 became subject to UK CGT on the disposal of all UK land and property.
Please see our article on non-UK residents and CGT on the disposal of UK property for further information.
We’re here to help
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.