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Investing in UK Property: Notes for non-resident investors
This briefing note identifies some key tax and financial issues arising for non-residents contemplating investment in the UK property rental market.
We have considerable experience advising overseas nationals on the tax and financial aspects of acquiring UK domestic and commercial property whether as an investment or for owner-occupation. We are always happy to arrange an initial meeting, without obligation, to explore the various practical ways in which we can assist persons investing in the UK. Some of the ways in which we can assist (more details are given in the body of the note) include:-
- Assisting in evaluating the most appropriate method of finance and in effecting introductions to lenders
- Advising on appropriate structures to avoid or minimise UK Income Tax, Stamp Duty, VAT and Inheritance Tax
- Introduction to appropriate UK advisers including legal advisers and letting management agents
- Establishing non-resident status with the UK Inland Revenue
- 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 UK Inland Revenue and advising taxation payments due
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: Berg Kaprow Lewis can assist in evaluating the most appropriate method of finance and in effecting introductions to lenders.
- 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.
- 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.
- If the property is furnished an annual allowance is available for wear and tear of the furniture based on 10% of (the gross rents less water rates or council tax).
The profit so computed is charged to UK tax at progressive rates rising from 10% to 40%. All UK resident individuals and some non-residents (broadly, citizens of the Commonwealth or of any state in the European Economic Area) are entitled to claim personal allowances. The income may also be subject to tax in the landlord '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 usually 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 the Inland Revenue. 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 the Revenue reject the application) a much harsher collection regime is imposed. A managing agent must deduct and pay to the Revenue tax at basic rate (currently 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 £l00 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.
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 combines features of a gift tax, death duty and wealth tax. For most non-UK resident 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 £312, 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 tax considerations 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 17.5% (temporarily reduced to 15% until 31 December 2009), 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.
Stamp Duty
Although it has not yet reached the levels found elsewhere in Europe, Stamp Duty is now a significant cost in acquiring property in the UK and will apply to all but the very cheapest properties. Where the price exceeds £500,000 the rate is 4%. Lower rates apply to cheaper properties. In each case Duty at the stated rate is charged on the whole amount of the price - these are thresholds not bands. As a result, the effective marginal rate of Duty on properties just over the break-points can be very high.
For more information please contact your normal contact partner.
