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    UK Property Tax for Foreign Investors

    Summary

    Lydia Field, Solicitor in Commercial Property, looks at the implications of the upcoming changes to UK property tax for foreign investors.

    Whether you are contemplating purchasing a property in the UK, or are thinking about selling, there is a lot to consider. At Seddons, our experts can take you through the entire life cycle of property ownership in the UK, from purchasing to gifting property on death.

    Whether you are looking to flip a property for a quick profit, or a long-term investment portfolio, we can help. We will take care of the details and make the process as stress free as possible, allowing you to concentrate on the bigger picture.

    One of the first decisions you will make when purchasing property in the UK is whether to purchase residential or commercial property. A big factor in this decision will be the tax treatment. We have broken down the various taxes to give you a brief overview of the taxes imposed on different phases of property ownership, and how they are determined.

    Please note, it is important that you seek local tax advice within the country/countries you are a resident of, or tax compliant.

    A review of your circumstances is recommended as taxation changes are being introduced in April, as this note explains. This note relates to the tax treatment of property as it applies to non-UK resident individuals and corporate entities.

    PURCHASING A PROPERTY

    Stamp Duty Land Tax (SDLT)

    SDLT is payable by the buyer on the purchase of both residential and commercial properties. It is payable on the purchase price, including any VAT paid. Different rates of SDLT are applied depending on the type and value of the property.

    Examples of the various types of property purchases are set out below:

    Residential
    1. Purchase of a property which will be the buyer’s first, or only, residence – Individual buyer

    The property must be the buyer’s first or only residence worldwide, and must be purchased by an individual, not a company. The purchase will then be subject to the Standard SDLT Rate, set out in the table below. There is a partial exemption and reduced rate of SDLT for first time buyers of properties with a value of £500,000 and below.

    Please note, the buyer’s spouse or civil partner is treated as part of the same unit as the buyer, so if the buyer’s partner owns a property anywhere in the world, the Higher SDLT Rate will apply.

    1. Purchase of a second, or additional, properties – Individual buyer

    Where the property is not going to be the buyer’s first, or only, residence worldwide, the purchase will be subject to the Higher SDLT Rate (3% increase on the Standard SDLT Rate) shown below.

    Residential Property Price Standard SDLT Rate Higher SDLT Rate

     

    (Charged on part of purchase price within each band)

     

    £0 - £125,000

    0%

    3%

    £125,000 - £250,000

    2%

    5%

    £250,000 - £925,000

    5%

    8%

    £925,000 - £1,500,000

    10%

    13%

    £1,500,000 and over

    12%

    15%

    1. Purchase of a property by a company

    Where the buyer is a company rather than an individual, a flat SDLT rate of 15% is applied.  However, this is subject to exceptions. Where an exception applies (such as buying the property for residential development purposes), the Higher SDLT Rate will apply.

    Commercial

    For commercial properties, the following rates are applied:

    Commercial Property Price Standard SDLT Rate

     

    (Charged on part of purchase price within each band)

    £0 - £150,000

    0%

    £150,000 - £250,000

    2%

    £250,000 and over

    5%

    A point to note

    In September 2018, Theresa May announced that there would be an increase in SDLT payable by non-UK resident buyers of UK residential property. The funds raised by this increase would be used to address homelessness in the UK.  It is anticipated that non-UK resident buyers will be expected to pay an additional 1% on top of the residential rates set out above. However, this is not yet confirmed and a consultation is expected in early 2019.

    Value Added Tax (VAT)

    Ordinarily, the sale of property is exempt from VAT. However, on the sale of commercial property, the seller can ‘opt to tax’ which removes the exemption, and makes the sale subject to VAT at 20% of the purchase price. 

    Sellers may opt to tax where they are going to incur expenditure in relation to the property, as it enables them to recover the VAT input tax payable on that expenditure.

    Where a commercial property is being sold as a going concern (for example, if it is tenanted or if the buyer intends to carry on the trading business in the property), it will not be subject to VAT, as long as both the seller and the buyer have opted to tax the property. 

    Please note, in order to opt to tax, the buying or selling entity must be UK VAT registered.

    OWNING A PROPERTY

    Income Tax

    For both residential and commercial properties, if the property owner is an individual, income tax is charged on rents achieved from UK properties. This applies to both commercial and residential properties, and the rate payable will be the rate at the time. At the time of publication, the rates are as follows:

    Income Tax Band Taxable Income Income Tax Rate

    Personal Allowance

    Up to £11,850

    0%

    Basic Rate

    £11,851 to £46,350

    20%

    Higher Rate

    £46,351 to £150,000

    40%

    Additional Rate

    Over £150,000

    45%

     

    If the property owner is a non-UK company, income tax is paid at a flat rate of 20%, rather than on the above scale. If the owner is a trust, the trustees pay a flat rate of 45%. 

    These rates are payable after deducting allowable expenses, such as maintenance and finance costs.

    A point to note

    Currently, UK companies which own UK Property pay corporation tax (currently 19%), instead of income tax. In April 2020, this will also apply to non-UK resident companies, who will pay corporation tax on their property income, rather than income tax.

    Annual Tax on Enveloped Dwellings (ATED)

    Where a corporate entity owns UK residential property valued at over £500,000, they must pay an annual tax on that property, called ATED. It is possible to get relief from ATED, but where ATED is payable, the following rates apply:

    Residential Property Value ATED Rate 2018/2019

    £500,000 - £1,000,000

    £3,600

    £1,000,000 - £2,000,000

    £7,250

    £2,000,000 - £5,000,000

    £24,250

    £5,000,000 - £10,000,000

    £56,550

    £10,000,000 - £20,000,000

    £113,400

    £20,000,000 and over

    £226,950

    SELLING A PROPERTY

    Capital Gains Tax (CGT)

    Currently CGT is only taxed on the sale of UK residential property, but from 6 April 2019, it will also apply to the sale of UK commercial property. This will bring the UK in to line with most other tax jurisdictions. 

    CGT is a tax charged on the increase in the value of the property, from the date of purchase to the date of sale, i.e. the ‘capital gain’.  The rates of CGT are as follows:

    Selling Entity CGT Rate

    Individuals

    18% or 28% (depending on their total UK income and gains)

    Trustees

    28%

    Companies

    20% (for companies not subject to ATED) or

    28% (for companies that are subject to ATED)

    From 6 April 2019, CGT will be taxed on the following:

    1. The sale of UK commercial and residential properties;
    2. The sale of ‘Property Rich, Significant Interest’ companies (PRSI Companies);
    3. The sale of a company whose subsidiary is a PRSI Company; and
    4. The sale of a group of companies whose assets, when added together, consist of 75% UK property

    A company is a PRSI company if it derives 75% or more of its value from UK property, and a non-UK resident holds at least a 25% interest in the equity of the company.

    When assessing the non-UK resident’s interest, HMRC take into account any interest held by a non-UK resident in the two years before the sale. This is to prevent someone transferring their interest prior to a sale to avoid the CGT liability.

    On 6 April 2019, commercial property values will be ‘rebased’ so that CGT will only be payable on gains accruing after 6 April 2019. However, a UK taxpayer can elect not to rebase their property; for example, if the new value would be lower than the value on purchase.

    One exception is for PRSI Companies that hold trading properties. The CGT charge will not apply to PRSI Companies which derive their value from UK Property used for trading purposes (unless it is to an insignificant extent). It is hoped that this will dispel concerns about the impact of the CGT charge on investment into UK businesses.

    Point to Note

    Individual, non-UK resident owners can apply for relief from CGT where they occupy the property as their main residence. To qualify for this relief, they must be able to show that they are at the property for at least 90 days in a tax year. They will then get relief for that tax year, but they will have to show the same proof again for each subsequent year, to continue receiving the relief. 

    However, by meeting this 90-day test, the individual risks becoming a UK tax resident.

    ON DEATH

    Inheritance Tax (IHT)

    All UK property held by an individual (whether or not they are a UK resident), will be subject to IHT at 40% on that individual’s death (save where exemptions and reliefs apply).

    Where property is held by a non-UK company, rather than directly by the individual, the individual’s shares in the company will be subject to IHT at 40%, to the extent that their shares are attributable to UK residential property. At the time of this note, commercial property held indirectly through a corporate entity does not attract IHT, however, this may change in the future. 

    FINALLY

    The UK Government has announced that from 2021, all overseas companies will be required to list their beneficial ownership on a public register, that must be maintained and updated annually by each overseas company. The draft bill, which will set out the implementation of the register, will be introduced in Spring/Summer 2019. Until then, some of the detail is still uncertain.

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