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Investing in UK Property: Important Notes for Non-Resident Investors

international estate planning non resident aliens

We are fortunate enough to have been in a position whereby we have worked with a number of non-UK resident joint venture business partners on property ventures in the UK therefore providing us with some insight into the tax and financial aspects of non-UK resident investors though we recommend you conduct your own due diligence and speak to qualified financial and tax advisors as we're not qualified to give advice. They will be able to assist in various ways as follows:

  • Advising on appropriate structures to avoid or minimise UK Income Tax, Stamp Duty Land Tax, VAT and Inheritance Tax
  • Establishing non-resident status with HM Revenue and Customs (“HMRC”)
  • Arranging for income to be received gross
  • Production of letting statements; identifying and maximising tax deductible expenditures and capital allowances
  • Submission of rental income returns to the HMRC and advising taxation payments due

In the meantime, let's go through some of the key taxes that will be payable when investing in the UK property market (Correct as of writing - 2nd April 2016).  

UK tax on rental income

UK income tax is charged on income from letting property situated in the UK regardless of the residence status of the landlord. This income is computed using ordinary accounting principles. For example:

  • Income and expenses are taken into account on an accruals basis.
  • Normal revenue expenses of earning the income are tax deductible, including repairs, maintenance, insurance, management fees etc. It is important that detailed records, including invoices, are kept.
  • Interest on a loan taken to acquire the property is in principle tax deductible though if the loan is taken from a connected party relief will be restricted to the amount of interest that would have paid in the open market. Even where capital is available it can often be tax efficient to borrow to invest in UK property.
  • Capital expenditure (for example, on improvements to property as distinct from repairs and maintenance) is not deductible from rental income. It will instead be regarded as an additional cost to be taken into account when calculating any gain arising on a disposal of the property provided it can be said to enhance the value of the property.
  • No tax relief is available for depreciation or amortisation of the property itself. But in the case of commercial property, capital allowances (effectively depreciation allowances at a low standardised rate) are available for those elements of the property which meet the description of “plant and machinery”. This can be a valuable relief and the element attracting these allowances is normally negotiated (within statutory limits) at the time of purchase. 
  • Capital allowances are not available in respect of residential property, but where the letting includes the provision of furniture, only 90% of the rentals are taxable.
  • All lettings carried on by a particular person are amalgamated for tax purposes and treated as a single business; thus if some properties are loss-making and others profitable, the set-off for tax purposes is made automatically.

Non-UK-resident property owners other than individuals (such as companies or trustees) pay tax on the profits so computed at a flat rate of 20%. Individuals are liable at progressive rates rising from 20% to 45%, though many non-resident individuals (broadly, citizens of the Commonwealth or of any state in the European Economic Area) are entitled to claim personal allowances which give exemption from tax for the first £10,000 or so of profit.

The income may also be subject to tax in the property owner’s home state though if there is a double Taxation Treaty with the UK (which is likely – the UK ‘s Treaties are among the most comprehensive in the world) the treaty will sometimes afford exemption from tax in the home state.

Payment of tax

A UK resident landlord includes the property income on the annual tax return he makes to HMRC. Tax for a tax year (which in the UK runs from 6 April to 5 April) is normally paid in advance of filing the tax return. Payment is made in two instalments on 31 January in the year and 31 July following the end of the year with sometimes a final payment on the following 31 January when the tax return is filed.

The treatment described above as applying to UK residents will normally be offered to any non-UK resident landlord who applies for it. However, if this treatment is not applied for (or if HMRC reject the application) a much harsher collection regime is imposed. Any managing agent must deduct and pay to the Revenue tax (at 20%) from rents net of any expenses that he pays on behalf of the landlord; a tenant who pays direct to the landlord must deduct tax at basic rate from all rent payments (unless the rent is less than £100 per week). Where tax deducted at source exceeds the true tax liability for the year it is possible to obtain repayment from the Inland Revenue by filing a tax return.

Taxation of Capital Gains on UK property

In general, UK tax on capital gains is assessed only on persons who are resident or ordinarily resident in the UK. Consequently if a non-resident person makes chargeable gain on UK property – whether it has been let or used as a home – there will in general be no UK tax liability on the gain, except where the property is residential, is owned by a “non-natural person” and is valued in excess of £2m (to be reduced by stages to £500,000) – in which case, a 28% tax liability arises, as per ATED (Annual Tax on Enveloped Dwellings). Further information about ATED visit our blog post here

From April 2015 the UK tax charge on capital gains is to be extended to all residential property in the UK, regardless of the structure through which the property is owned and regardless of its value. Gains on commercial property will remain outside the scope of UK tax. For more details on the extended CGT charge, please read our blog post here

A word of caution is needed though: the tax rules summarised above assume that the investment in real estate is a genuine investment, made in order to generate rental income and with a view to long-term capital growth. If however property is acquired with the sole or main object of realising a profit on disposal, with or without any development of the property, any gain on disposal will normally be treated as income rather than as capital gains. It will therefore be subject to UK taxation as income and the beneficial treatment of capital gains referred to above will not be available.

Inheritance Tax

Inheritance Tax (which is normally payable only by individuals) combines some of the features of a gift tax, death duty and wealth tax. For most non-UK resident individual property investors who have had no prior connection with the UK only assets within the UK will be within its scope. Although, with a 40% rate on death and a 20% rate on lifetime transfers, Inheritance Tax is at first sight a significant impost, there are many reliefs and exemptions which, properly used, can greatly reduce its impact. In particular:

  • the first £325,000 of transfers (on a seven-year rolling basis) are free of tax
  • many transfers are “potentially exempt ” and create a charge to tax only if death follows within seven years of the date of the transfer
  • the use of trusts may often effect substantial savings

Nonetheless, it is sometimes worthwhile for Inheritance Tax purposes to consider owning any UK property through the medium of a non-UK registered company, subject to any other tax considerations both in the UK and in the home territory of the non-UK-resident owner.

Value Added Tax

Many of the costs incurred by investors in UK real estate will be liable to UK VAT at 20%, including legal, architects and survey fees, estate agents charges and other professional costs. Since the letting of residential accommodation is (in almost all cases) not a “taxable activity” for VAT purposes, the VAT suffered on those costs is not generally recoverable. Furthermore, VAT remains chargeable on services relating to UK land regardless of the place in which the recipient “belongs” for VAT purposes; the zero-rating available in respect of certain international services is not available where the services relate directly to UK land. Some associated services less directly connected with land (for example, accountancy fees) will usually be zero-rated where supplied to a non-resident.

Some commercial property is within the scope of VAT and it is normally possible to elect (on a property-by-property basis) to bring commercial (but not residential) properties within the VAT regime.  

Stamp Duty Land Tax

Stamp Duty Land Tax (“SDLT”) is now a significant cost in acquiring property in the UK and will apply to all but the very cheapest properties. Tiered rates apply and it's best to use the Stamp Duty Land Tax Calculator on HMRC's website as there are regular budget changes to the structure in which the tax is calculated.  

High-value residential properties owned by companies

New rules were introduced in 2012 affecting the tax paid in relation to residential properties that are purchased and owned by companies, for properties with a value in excess of £2,000,000. The threshold will progressively be reduced to £500,000 by 5 April 2016. Where these rules apply, they can create a higher SDLT rate on purchase; an Annual Tax Charge of up to £143,750; and an uplifted CGT charge on sale. Further details can be found in our blog post about Expensive Residential Dwellings. 

We work with property tax specialists on a daily basis so if you'd like obtain the details of our preferred advisor then please either get in touch via our contact us page or leave a message below, we'd love to help.  

Thanks for reading, 

Happy Investing.

The Estateducation Team. 

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