UK property taxes for overseas investors – Introduction
The UK has long been an attractive destination for overseas high net worth individuals (HNWIs) seeking to invest in residential property.
Historically, many of these investors utilised offshore companies to hold their UK real estate, benefiting from various tax advantages including the ability to completely shelter the underlying UK property from UK inheritance tax.
However, someone who was thinking of following such a tried and tested route and had not had tax advice for over a decade would be in for a foundation shattering shock!
This is because former Chancellor George Osborne identified bricks and mortar (or should that be glass, steel and cement as well) as ripe for the picking when it came to tax raising potential.
In this piece we outline some of the key changes which have drastically altered the skyline for overseas property investors in the UK.
The Annual Tax on Enveloped Dwellings (“ATED”)
Way back in 2013, the UK introduced what was then an unusual new tax called ATED. As the name implies, it’s an annual tax and it is levied on high-value residential properties held in so-called corporate “envelopes”. These were typically offshore companies.
When first introduced, it triggered on properties with a minimum market value of £2m. However, never one to look a gift cash cow in the face, the government has successively lowered the threshold for ATED over the years.
It now applies to all residential properties worth more than £500k held in corporate envelopes. So, this is not something that is only limited to properties in Belgravia or Mayfair.
There are, however, important reliefs from ATED that might be secured depending on the circumstances.
For example, one key relief is where the enveloped properties are (1) rented out commercially to (2) third parties as part of property rental business.
There are other exemptions for commercial activities such as property development and for guest houses / B&Bs.
Capital gains tax (“CGT”) for non-residents and UK real estate
One of the basic tenets of UK CGT is that, under first principles, it is only applicable to UK residents. However, there are a number of anti-avoidance provisions that dilute this so it is far from being a hard and fast rule.
However, and we can thank Mr Osborne again, April 2015 saw a limited extension to the jurisdictional net for CGT with the introduction of something with the catchy title of Non-Resident CGT (“NRCGT”).
This means that anyone selling or transferring ownership of a UK residential property is now obliged to pay CGT on any increase in its value from 6 April 2015. This is regardless of their UK tax residence status, unless reliefs such as Principal Private Residence Relief applies.
Moreover, since 2019, this charge cannot be avoided by selling shares in a company which holds UK property.
This is because subsequent rules were introduced that subject the sale of shares in “property rich” companies to CGT. A property rich company is one which derives at least 75% of its value from UK property.
Transitional rules applied which would effectively provide for the rebasing of assets at 2015 prices, which ameliorated some of the worst effects.
But any new investors should be aware of the fact that gains in UK real estate will now be firmly within the UK CGT net.
Stamp Duty Land Tax (SDLT)
From 2012 onwards, the rates of UK’s land transfer tax – in the form of SDLT – have spiralled increasingly skywards.
In addition, the rules have become more complex and different categories of purchaser have been identified as ripe for taxation.
For example, when ATED was introduced, a new penal rate (it was penal at that time!) of 15% was introduced on the purchase of residential property by corporate entities.
Subsequent tax changes have included the introduction of a 3% surcharge for those who have the temerity to already own a residential property anywhere in the worldwide.
More recently, an additional 2% SDLT surcharge for non-resident purchasers. Again, little more than a cash grab from those who are unlikely to have an impact at the polling booth.
These new rules significantly increased the transaction cost for foreign investors buying UK property and really need to be factored into the economics of any prospective purchase.
Inheritance tax (“IHT”)
Perhaps the death knell for classic property holding structures were the changes to the IHT excluded property rules that were introduced in 2017, along with the other significant changes to non-dom taxation.
Rules now apply which broadly have the effect that, if one looks all the way down the structure, and it contains UK bricks and mortar, then the person with a beneficial interest in that property will not escape IHT on its value.
Further, such property subject to a trust may also be subject to the 10 year charge as and when it comes around.
Effectively, the excluded property rules are switched off.
As such, there is no longer any IHT advantage in holding UK property in an offshore company. In fact, doing so may even result in a higher UK tax exposure if ATED applies.
Transparency measures
In addition to the tax measures set out above, the UK has also implemented various transparency measures.
These measures require offshore companies to disclose their beneficial ownership information.
This is as follows:
- Corporate structures: There is now a requirement to register the ultimate beneficial ownership on the UK’s publicly accessible Register of Overseas Entities (ROE);
- Trust structures: individuals holding properties through a trust may also be required to be registered as beneficial owners on HMRC’s Trust Registration Service (TRS).
Conclusion
It should be clear from the above that the legislative landscape in respect of UK residential property has changed enormously over the last 10 years.
Although not usually an issue at the forefront of buyers’ minds, HNWIs wishing to invest in UK properties should seek tax and structuring advice at the outset of any transaction.
Final call
If you have any queries about this article regarding UK property taxes for overseas investors, or UK tax matters in general, then please get in touch.