Real estate structuring options

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In this article, we highlight some key issues on the UK tax treatment of the main ways in which non-UK residents can buy and hold UK real estate, including recent and anticipated changes.

The most appropriate vehicle overall depends on several factors: e.g., whether residential or commercial real estate is to be acquired, intended use, asset protection and tax efficiency, both in the UK and elsewhere. 

The following summary of some of the main points is made to assist but it is not formal legal advice and must not be relied upon as such. The overall actual tax position depends upon the circumstances, including where any overseas investor is tax resident or domiciled or a US citizen, whether there is any applicable double tax treaty and how the acquisition is funded. Accordingly, specific advice should be obtained on your own circumstances before a choice is made of the most appropriate vehicle for you. 

Buying in your own name 

This has become the most common way to own UK residential property for use as a main or secondary home because the most historic UK tax advantages of holding this via an offshore trust or company no longer exist, especially as these structures involve substantial set-up and running costs as well as potentially complex tax treatment.

Anyone who buys UK real estate will pay a land transfer tax unless the property is of very low value. In England and Northern Ireland, this is called stamp duty land tax (SDLT). There are similar taxes in Scotland and Wales. The rate of all three taxes depends on the price paid and some other circumstances, such as where there are multiple acquisitions.

For SDLT, there are lower rates if certain conditions are met for individuals buying their first home for under £500,000. From 1 April 2021, there has been a 2% SDLT surcharge if any purchaser of UK residential property is treated as a non-UK resident for the purposes of this surcharge.  There are some exceptions, but the rules are complex, and advice should be sought on their potential applicability.

Anyone owning UK real estate in their own name may pay UK inheritance tax (IHT) on making a gift of it, either during their lifetime or on death. Gifts between spouses are usually exempt from IHT as are certain other gifts.

On a sale or other disposal of UK real estate, any increase in its value from acquisition is usually taxed to capital gains tax (CGT) of up to 28%. In some cases, CGT is not payable, principally if the property has been a main home throughout your ownership of it. Non-UK resident individuals have been subject to CGT on disposals of UK residential property since April 2015 and on disposals of UK commercial real estate since April 2019.

If you rent a UK property, you will pay income tax on the rent after any deductible rental expenses. The tax rate depends on your overall UK taxable income and can be up to 45%. Your tenant or managing agent must pay 20% tax on the rent unless you have obtained permission from the UK tax authority (HMRC) to have the rent paid to you with no tax deducted.

You must file an annual tax return with HMRC and pay any tax due. From April 202, interest on loans to buy property is deductible only against the basic rate tax liability on the rent (currently, this is 20%). 

VIA a partnership

This option is available to two or more investors who wish to have a UK property business. There are several types of partnership. Limited partnership and limited liability partnerships combine some limitation of liability of partners to creditors and others (somewhat like a company) but unlike a company each partner is taxed on his or her share of partnership assets and its capital and income profits as if they owned them personally. If a company is a partner, special rules can look through the company to its shareholders who are then taxed as partners themselves. 

Using a non-UK incorporated company

Using a non-UK company with non-UK directors to buy UK residential property was historically popular for overseas buyers because this avoided IHT for non-UK domiciled individuals and if the shares of the company were sold rather than the property, there was no CGT for the seller or SDLT for the buyer.

Since April 2017, this IHT advantage only longer exists if the company is non-close or if close, for shareholdings of less than 5% of the value of all the shareholdings taken together.  A company will be “close” if 5 or fewer people control it.

Shareholdings of connected shareholders, such as most family members, are taken into account to ascertain in a company is close and for the 5% value threshold.

Loans made by overseas lenders which are used to acquire UK residential property and can be subject to IHT (on which see further below under heading Funding Acquisitions of UK Real Estate), as well as non-UK collateral for such loans. 
The IHT advantages of a non-UK company to hold UK commercial real estate remain (for the time being anyway), for individual shareholders who are non-domiciled for UK IHT purposes.

Non-UK companies now pay UK corporation tax on gains realised on disposing of UK residential and commercial real estate as well as on any rental income after deductible expenses.

A non-UK company must register with HMRC for corporation tax, even if already registered to pay income tax and must file returns online. Corporation tax has a specific set of computation rules, including restrictions on offsetting loan interest and depreciation (known as capital allowances) against taxable profits. The corporation tax rate is currently 19% and is due to rise to 25% from 6 April 2023.

If more than 75% of the non-UK company’s value derives from UK real estate, it is known as a “UK-property rich” company.  Any non-UK resident shareholder with a holding of more than 25%, subject to certain exceptions, will pay UK tax on gains realised on any disposal of that shareholding.

If a company owns UK residential property worth over £500,000 it may also have to pay the annual tax on enveloped dwellings (ATED) unless the property is used for certain purposes, such as letting to someone unrelated to the company’s shareholders who pays a market rent.

For properties worth over £20 million, the annual ATED charge is over £200,000. 

Also, a higher rate of SDLT applies unless the company is exempt from ATED on acquiring a UK residential property and for the following three years.  Non-UK companies also pay a 2% surcharge.

If a shareholder of a non-UK company is UK resident, he or she can be liable to pay UK income tax and CGT on the company’s income or gains as they arise.

If the key decision-makers of a non-UK company make those decisions in the UK, the company can become UK tax resident as a result and taxed accordingly. Shareholders can also be taxed on benefits enjoyed over company-owned assets under the UK’s “benefits in kind” legislation, especially if they are UK tax resident. 

Using a UK incorporated company

Except in certain limited circumstances, a UK incorporated company will be UK tax resident and pay UK corporation tax on its worldwide capital and income profits. UK companies are subject to ATED and SDLT in relation to any UK residential real estate they own, on the same basis as non-UK companies.

A UK-incorporated company can become non-UK tax resident if controlled and managed outside the UK and is also tax resident in another country both under its local law and under a tax treaty between the UK and that other country. If this happens, it can trigger UK tax liabilities.

Directors, employees (and anyone who is not a director but takes key decisions) can be taxed on benefits enjoyed over company-owned assets under the UK’s “benefits in kind” legislation.

Non-UK resident shareholders are not subject to UK tax on dividends and benefits from limited liability but are subject to CGT on disposals of holdings over 25% in “property-rich” companies.

Shares can be sold without SDLT, but 0.5% stamp duty is paid by the buyer. Shares of UK companies are UK assets for IHT to the extent that their value derives from UK residential property, loans used to acquire it and collateral for such loans, and as such holders of them are subject to IHT charges.  Loans made to such companies can also be treated as assets within the scope of UK IHT.

VIA a trust/foundation

Most of the UK tax advantages of a trust or foundation owning UK real estate (especially residential real estate) have now been removed. They are also subject to increasingly complex tax legislation. They are now usually used where asset protection or succession planning are the principal objectives.

If a trust (even if the trustees are non-resident) owns UK residential real estate, it is now subject to IHT even if held by an underlying non-UK company. IHT charges can occur on adding UK real estate to a trust, whilst it is held by the trust and when it leaves the trust.

If the person who creates the trust (called the settlor) can benefit from it, he or she can be treated as owing its UK real estate for IHT purposes and be taxed accordingly. Also, a UK resident settlor who can benefit from the trust can be liable to pay UK income tax and CGT on the income or gains of the trust and also of any underlying company of the trust as they arise.

A non-UK resident trust is subject to CGT on disposals of UK real estate (and shares in UK-property rich companies) on the same principles as a non-UK resident individual. If UK real estate is held by an underlying company, the UK corporation tax rules on gains on disposals apply instead.

There are special IHT, income tax, CGT and SDLT rules for trusts depending on whether anyone is entitled to occupy/ use trust-owned UK real estate or to any income generated by it. 
Non-resident trusts (and underlying non-UK companies) are also subject to the 2% SDLT surcharge.

By a collective investment scheme (CIS)

Some holdings in a non-UK CIS which invests in UK real estate can be exempt from IHT. They can be structured to be taxed like a company or like a partnership for income and gains tax purposes.

Like companies, they are potentially subject to ATED and if so, to the corresponding higher SDLT rate on acquisition if they invest in high value UK residential real estate. If the CIS is non-UK resident, the 2% SDLT surcharge will apply.They may also have to comply with UK/ non-UK investment funds regulations.

By a pension scheme

UK tax law distinguishes between “recognised” and "non-recognised” pension schemes. Recognised schemes (which can include non-UK schemes approved by HMRC) benefit from several UK tax advantages. For example, they are exempt from tax on investment income and gains and from IHT on their assets. Contributions are tax relievable.

However, if they hold direct or indirect interests in residential property for a scheme member, these will give rise to tax charges for the member.

Unregistered pension schemes can hold UK residential as well as UK residential property but whilst they may meet the criteria to be exempt from UK IHT on those, they will be subject to UK income tax and CGT on income or gains respectively generated by them.

From 1 April 2021, SDLT on acquiring residential property in England and Northern Ireland is proposed to increase by 2% if the pension scheme is non-UK resident.

Both registered and non-registered pension schemes must under UK tax law be for the purpose of conferring pension benefits to individuals no earlier than the age of 55.

Some non-tax issues

If you let out a UK property, there are regulatory matters with which you must comply, for example obtaining gas and electricity safety certificates and complying with the statutory rental deposit scheme. You must also have evidence that your tenants have the legal right to be in the UK. A property letting agent should be able to confirm those requirements that apply to you and assist you in complying with them. In addition, some leasehold properties have conditions restricting sub-letting, particularly of just part of it. You should also have landlord liability insurance.

Whether you own UK real estate in your own name, via a partnership or a company you should ensure you have a suitable Will or other appropriate way providing for who will inherit it in the event of your death. Depending on where you live and your nationality, you may or may not have the freedom to leave these assets to whomever you wish.

This is where a trust or foundation created in your lifetime owning UK real estate (either directly or via an underlying company) can be useful, as its terms and not those of a Will determines who can benefit from it after your death.

If you own the property or company shares jointly with one or more other people, this can pass to the survivor of you automatically. If you own part of a UK property and do not want this to happen, the co-owners should hold the property as tenants in common.

It is also prudent to have appropriate powers of attorney in place, so properties or company shares can be dealt with if away from the UK or in case of physical or mental capacity. 

In relation to confidentiality

  • If you own a UK property in your own name, this will appear in the publicly accessible UK Land Register. 
  • All UK companies must provide details of all “persons with significant control” to Companies House which will add them to the publicly accessible register.
  • The Economic Crime (Transparency and Enforcement) Act 2022, when it comes into force later in the year, will require all non-UK corporate entities which intend to acquire UK land (or already own it) to provide within 6 months the details of all beneficial owners with more than a 25% share to the registrar created by the Act. Failure to do so will risk fines, imprisonment and civil penalties and being prevented from registering transfers of the UK real estate in question.
  • The trustee of any UK or non-UK trust which incurs a liability to certain UK taxes from 6 April 2016 onwards must register with HMRC’s online register of trusts (called the “TRS”) and provide detailed information on the trust.
  • Even if a non-UK trust has not incurred a UK tax liability, it must register if on or after 6 October 2022 it acquires UK real estate directly or has at least one UK trustee and enters into an ongoing business relationship with a UK person or entity.  Registration is required by 1 September 2022 for trusts which trigger registration requirements before then or else within 90 days.
  • There are some exceptions from the requirement to register on the TRS, but the rules are complex and specific advice on their potential applicability should be sought.

Please note, this summary of some of the main points is made to assist but it is not formal legal advice and must not be relied upon as such. The overall actual tax position depends upon the circumstances, including where any overseas investor is tax resident or domiciled or a US citizen, whether there is any applicable double tax treaty and how the acquisition is funded. Accordingly, specific advice should be obtained on your own circumstances before a choice is made of the most appropriate vehicle for you. 

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