Buying or selling holdings in the UK can be complex and confusing, particularly if you are purchasing from overseas.
Residential property in the UK has arguably been under attack for at least 10 years. This started in 2012 when the government found that by using corporate structures, non-UK residents were able to pass beneficial ownership of UK residential property down through generations without paying inheritance tax.
In addition, there were concerns regarding stamp duty land tax (SDLT) avoidance, as property-holding companies could sell a property to a buyer to avoid an SDLT charge.
Buying or selling holdings in the UK and Property Tax
The government also reviewed other property tax loopholes. These included capital gains, income, and corporation tax.
Therefore, there was the introduction of an entirely new tax. The annual tax on enveloped dwellings (ATED). This is a tax payable by companies that own UK residential property worth over £500,000.
Even though purchasing UK residential property can be complex and confusing, it is still an attractive proposition for the foreign investor for a variety of reasons.
This article will take a look at the developing rules and summarise the changes that have already been introduced. This includes changes to taxation, ownership, and sales.
Stamp duty land tax (SDLT)
SDLT is a tax on the price paid for a property or transfer of land. The SDLT payable where a residential property of more than £500,000 is purchased by a company is 15%. There are reliefs available such as where a property is to be rented for at least the following three years. This has been extended and now applies to properties over £500,000.
In April 2016, the government introduced an additional rate where people buy a ‘second home’. This also takes into account overseas properties. This will mean even if your other properties are in a different country, you may still have to pay the 3% surcharge when buying in the UK.
From 1 April 2021, the government will also be introducing a 2% surcharge for non-UK residents who purchase a residential property in the UK. As well as individuals, this will also include any company, partnership, and trustees overseas.
If you are buying or selling holdings in the UK, currently, due to the Covid-19 pandemic, there is an SDLT holiday on UK residential properties where there is no SDLT payable on properties up to £500,000.
What you need to know when buying a property in the UK as a company
- The Annual Tax on Enveloped Dwellings (ATED): ATED is an annual tax that is payable mainly by companies that own residential property in the UK.
ATED was introduced in April 2013. The purpose was to encourage families to remove their UK properties from a corporate firm and instead to hold them in their personal names.
Initially, ATED affected residential properties that were owned by companies or partnerships, etc. in addition to properties valued at over £2million. But the government extended this to apply to properties worth over £500,000.
However, there are reliefs available. For example, when the property is being rented to someone unrelated to the owners or when the property is being redeveloped.
Although, this did not encourage as many families to transfer the properties into personal names as the government had hoped. In response, the rates were increased to 50%. This means the annual tax on a property worth £2.1million would be £23,350.
As the charge is linked to the Consumer Prices Index, the ATED can increase in line with inflation. This is something to consider if you are looking at buying a property in the UK in a company name.
- Income Tax: Previously, private individual landlords were able to take away the costs of mortgage interest payments from their gross rental income for tax purposes. However, on 6 April 2017, the government introduced new rules which removed these rights. The restrictions have been brought in gradually. For the tax year 2017/2018 a private individual could deduct 75% of their mortgage interest costs but from the start of the current tax year, they can no longer deduct these payments. These changes do not apply to a corporate landlord, so holding a buy-to-let property in a company name can still remain beneficial. A corporate landlord will also pay corporation tax at the rate of 19% instead of the individual landlord who will pay income tax ranging from 20% – 45% depending on their tax margin.
- Inheritance Tax (IHT): Prior to April 2017, shares owned in a foreign company owning UK property were not considered to be an asset owned in the UK. Therefore, no inheritance tax was payable. Consequently, the government introduced new IHT rules that would apply to the corporate structure. These rules apply if a shareholder gifts shares prior to their death. The rules also apply when a UK property is sold after the shareholder’s death.
The new IHT rule only affects companies that have 5 or fewer members or directors, however, the number of shares held by the individual is irrelevant.
For example, even if an individual only holds 5% of shares in a foreign close company owning UK residential property, then this is enough for the rules to apply.
These rules also apply to non-resident trustees that hold shares in a foreign company owning UK residential property.
The shares in the company will be treated as ‘relevant property’ meaning that IHT charges may be payable. IHT will be payable every ten years from when the company was formed.
These rules can also apply to trusts who have never had to pay UK tax, for example where the settlor, beneficiaries, and trustees have never lived in the UK.
The rules can also apply to anything which is considered capable of being a residential property, which could include properties that are used as offices but could be converted into a house or flats.
This is something you will need to consider if you are looking to purchase a UK company as an overseas company or trustee.
Loans made to acquire, maintain or enhance UK residential property and security
Loans made to fund the purchase, maintenance, or building work to a UK property are now considered to be a UK IHT asset in the hands of the lender. Similarly, any security that is given as security for the loan is also an IHT asset. Loans from a bank will typically not be caught by these rules, but they do apply to private arrangements where an individual, trustee, or close company lends to another individual for these purposes. For example, a mother making a loan to her son so that he can buy a home in the UK or carry out works to the property, the debt held by the mother would become a UK IHT asset and therefore IHT could be payable on it on her death. Equally, if the mother’s offshore investment portfolio was used as security or a bank loan made to her son then the portfolio would become a UK IHT asset
Trustees and companies will therefore need to be careful when making any loans or providing security to see whether they will be caught by these rules.
UK register of residential property
The Registration of Overseas Entity Bill is due to come into force sometime next year. Under this Bill, any ‘Overseas Entity’ (set to include a company, partnership, or other legal entity that is registered outside of the UK), that owns UK land or is looking to purchase UK land will have to provide information about its owners to Companies House. This information must be detailed and updated annually and will be stored on a publicly available register. Any Overseas Entity that fails to do this could be prevented from transferring that land and could even face criminal liability, punishable by fines and possibly imprisonment.
This is something to bear in mind if you are a company or partnership overseas looking to purchase property in the UK.
Disposals of UK Residential Property
Disposals of UK residential property by non-residents previously did not fall under the UK capital gains rules. However, in April 2015, the UK’s capital gains tax regime was extended to include all non-residents that hold UK residential property over the price of £500,000.
In April 2019, the government announced that gains on the sale of UK residential property by a company would be subject to corporation tax rather than capital gains tax. CGT still applies to non-resident individuals and trustees who are selling UK property.
The government has also introduced a regime to tax the sales of UK properties on entities where 75% of their value is from any UK land and where the individual owns a 25% interest in that entity. CGT will also apply to any sales that fall under this.
What are the options?
Structuring how to hold a residential property in the UK has become more challenging in recent years, but options do still exist. A bespoke approach will be required to decide the most suitable ownership in any given case. This will depend on your residence status, the intended use of the property, the value, whether it is to be purchased with a mortgage or cash, and for how long the property is likely to be held. Some of the available options are detailed below.
UK IHT is not normally payable where an individual dies and leaves their UK property to a surviving spouse or civil partner, or the property is held as joint tenants. This is one way in which you could defer any IHT charges on UK property until the second death in a marriage.
It could be appropriate to pass UK property (or relevant company shares) onto later generations with the intention of minimising any IHT charges. The gift would fall under a disposal or CGT purposes though and there could also be an SDLT charge.
IHT is chargeable on the net value of assets, therefore if a mortgage is taken to purchase UK residential property, the outstanding amount will be taken away from the gross value of the asset upon death for IHT purposes. This could limit IHT payable but would also limit your equity in the property.
Life insurance policies can be a simple and effective way of ensuring that there are funds available to settle any IHT liabilities that could arise.
Trusts can provide protection of assets. They are subject to different UK IHT rules which can lower the charges payable compared to if the property is held through an individual or person. They also provide more certainty on the tax position as IHT is charged regularly.
Many people will be concerned about privacy, particularly if they live in countries with high levels of crime or corruption and corporate envelops have provided a way for families to reserve that privacy. Whilst it does not provide any tax advantages, English law will allow a company or any other person to hold the property’s legal title and keep the identity of the beneficial owner private.
Some people may seek lending from a non-resident trust or company of which they are a beneficiary. The value of the debt would be considered a UK asset for IHT purposes and the trustees would therefore be subject to IHT charges.
If the property is going to be held beyond the lifetime of the settlor this could be an attractive option as the loan would be deductible from the borrower’s estate and would be subject to 10 yearly IHT charges at 6%, rather than paying 40% IHT if the debt were held by an individual.
The beneficiary would be treated as receiving a benefit from the trust or company to the value of the interest and may be subject to income tax.
The UK property market has provided investment returns for international individuals and families for generations and it remains an attractive place to invest due to being in a central time zone and having a robust legal system. London in particular remains a world-leading financial business centre with first-class restaurants, theatres, art, history, and entertainment.
It is still important to consider the structure of holding a property in the UK. Holding a property as a non-UK company and holding the shares directly or through a trust no longer makes sense from a UK tax perspective, but a number of other options do remain and, with the right advice, property in the UK can be a profitable investment as well as an asset for families to enjoy whilst here in the UK. The importance of taking tailored, professional advice has never been greater.