Investing in UK property: important notes for non-resident investors
This page 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, 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 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 land tax, VAT and inheritance tax
- Introducing appropriate UK advisers including legal advisers and letting management agents
- Establishing non-resident status with HM Revenue & Customs (HMRC)
- Arranging for income to be received gross
- Identifying and maximising tax deductible expenditures and capital allowances
- Submitting rental income returns to the HMRC 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 can be taken into account on an accruals or an arising basis.
- Normal revenue expenses of earning 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 relief will be restricted to the basic rate of tax on a transitional basis from 6 April 2017 and phased in over 4 years.
- If the loan is taken from a connected party then relief will be restricted to the amount of interest that would have been paid in the open market. Even where capital is available it can often be tax efficient to borrow to invest in UK property. We 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 that 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 (which are 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.
- 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 owners other than individuals (such as companies or trustees) pay tax on the profits 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 any state in the European Economic Area and certain Commonwealth countries) are entitled to claim personal allowances which give exemption from tax for the first £11,000 or so of profit.
The income may also be subject to tax in the property owner’s home state, although 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 sometimes paid in advance of filing the tax return. Payment is often 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 the UK only taxes individuals who are UK tax resident to capital gains tax. The main exception is on residential property. The legislation allows three ways in which such gains can be taxed however in most cases tax will be charged based on the proceeds less the value at 5 April 2015 (or if the property was purchased after 5 April 2015 the cost at purchase).
Non-resident companies have potentially been liable to UK capital gains tax on the disposal of UK residential property since 1 April 2013 if the property was valued at more than £2 million. That threshold has now dropped to £500,000 and covers most properties in the London area.
Disposals of commercial property by non-resident investors remain exempt from UK capital gains tax.
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.
IHT: 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
Commercial property held through an offshore company is not liable to UK inheritance tax. However from 6 April 2017 UK residential property will be liable to UK inheritance tax irrespective of how it is held.
VAT: 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. We can advise on whether such an election is necessary, possible or desirable and to assist with relevant registrations. Residential and commercial developments and conversions may be affected by special rules on which we can also advise.
SDLT: 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. (Banded rates apply: for commercial properties, the highest rate is 5%, for properties costing over £250,000: for residential properties the highest rate is normally 12% (for properties costing over £1,500,000) but in some cases can be as high as 15%. In addition a 3% surcharge can apply when a second properly is being purchased.
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 was reduced to £1 million at 1 April 2015 and £500,000 at 1 April 2016. Where these rules apply, they can create an SDLT rate of up to 15% on purchase; an Annual Tax Charge of up to £218,200; and an uplifted CGT charge on sale. Fuller details of these special rules can be found in our Expensive Residential Dwellings briefing.
For more information or help from one of our property and real estate specialists, please contact us using our enquiry form.