UK property has long been an investment of choice for non-UK residents looking for a stable and secure home for discretionary savings. This has historically also come with some significant tax advantages from the UK perspective.
This status has been under attack for some time and many of the advantages have been whittled away to the point where the UK no longer offers any tax advantages over competing investment jurisdictions. It remains to be seen whether this diminishes the UK roles as real estate investment jurisdiction of choice. We have a look at some of the changes below.
UK tax on gains
Gains realised by non-residents on the disposal of commercial (non-residential) UK real estate have historically been tax-free. In last year’s budget, the chancellor announced that this would end in 2019. More details will be shared as they become available.
Capital Gains on the sale of residential real estate by non-UK resident individuals and trusts are taxable at rates of 18% and/or 28%. Narrowly controlled Non-UK resident companies are subject to tax on such gains at 20% and/or 28%.
UK Income Tax
Net rental income after deductions is taxable in the UK. The rate of tax depends on the type of investor. Offshore companies are subject to a 20% rate whilst Non-resident individuals and trusts are subject to progressive income tax rates of up to 45% in a similar manner to resident individuals.
Annual tax on enveloped dwellings (ATED)
In addition, ATED can apply to residential property worth over £500,000 owned other than by individuals. ATED generally does not apply if the property is let out for commercial purposes although an exemption must be claimed. Annual returns (including claims for exemption) and tax payments are due by 30 April.
Financing
Interest on loans incurred wholly and exclusively for a UK rental business is generally deductible in calculating taxable income provided that any interest charged is on an arm’s length basis. Also withholding tax may apply on interest paid out of the UK to a non-resident.
Repairs and renewals
Repairs and generally allowed as a cost in calculating taxable income. From 2016, the cost of replacing loose items of furniture may also be claimed provided that this does not constitute an improvement.
Losses
Losses on one property are allowed to be offset against profits on other properties and may be carried forward.
Non-Resident Landlords Scheme NRLS
Under the NRLS an annual tax return must be filed by the 31st January following on from the last year ending 5 April. Payments may also be made on installment on the 31st July and 31st January of each year. It is important to register under the scheme as failing that the tenant is obliged to withhold 20% of the gross payment. This may be significantly more than any actual tax liability.
Stamp duty land tax (SDLT)
SDLT is chargeable on the acquisition of UK property. Commercial property bears SDLT at rates up to 5%. Residential property, however, has been subject to some fairly penal increases. These rates increase progressively up to 12% but this may increase by a further 3% for companies and for individuals who already own another home.
Inheritance tax (IHT)
UK IHT is payable on the death of non-UK resident individuals at a rate of 40% of assets over £325k. Although this may be reduced by owning the property by way of a non-UK property, this leads to exposure to SDLT at 15% and potentially to ATED.
Summary
It is self-evident that many of the advantages enjoyed by offshore ownership of UK properties have been whittled away and in many instances the changes are prohibitive. It remains to be seen what impact this will have on long term offshore investment in UK real estate, but in our view this is likely to have a significant negative impact.