Real estate structuring options - in depth - Gateley
In depth

Real estate structuring options

Gateley Legal

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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.

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 depend 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, a 2% surcharge has been proposed if there is at least one non-UK resident acquirer. The detail of this extra charge is still unclear as Finance Bill 2020 published on 19 March 2020 contains no provisions concerning it. 

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 2017, there have been limits on the deductibility of interest on loans to buy property against your UK rental income. By April 2020, this will only be deductible against basic rate of tax (currently 20%). 

From 6 April 2020, both UK and non-UK residents must however file a return and pay any CGT due within 30 days of completing a sale or other disposal of UK residential real estate. 

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 no longer exists unless a shareholder has less than 5% of the shares (including those of close family members). 

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 have paid UK tax on gains realised on disposing of UK residential real estate since April 2015 (from April 2013 for certain properties worth over £2million). 

Non-UK companies have also paid UK tax from April 2019 on disposals of UK commercial real estate with their non-UK resident shareholders paying tax on gains realised on disposals of shareholdings over 25% in such companies if more than 75% of the company’s value derives from UK real estate (known as “property rich” companies). 

From April 2020 non-UK companies also pay 19% corporation tax on net rental income (instead of income tax) and on capital gains accruing from that date on both UK commercial and residential real estate. They will need to register with HMRC for corporation tax, even if they are 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 .

If a company owns UK residential property worth over £500,000 it may also have to pay the annual tax on enveloped dwellings (ATED). If the property is used for certain purposes, such as letting to anyone related to the company’s shareholders who pay a market rent. For properties worth over £20 million, the annual ATED charge is over £200,000.

Where a property is subject to ATED, ATED-related CGT applies on any capital gains on disposal. Where the 15% flat rate of SDLT does not apply, the 3% supplemental rate of SDLT will apply unless the property being acquired qualifies for the commercial rate of SDLT. From 1 April 2021, these rates are proposed to all increase by 2%. 

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. They 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, this type of company is automatically UK tax resident and pays 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 hold on the same basis as non-UK companies. 

A UK-incorporated company can though 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 and as such holders of them are subject to IHT charges. 

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 trust is subject to CGT disposals of UK real estate on the same principles (including the 30 deadlines for filing returns from 6 April 2020) as an individual. If UK real estate is held by an underlying company, company tax rules on gains apply instead. 

There are special IHT, income tax, CGT and SDLT rules depending on whether anyone is entitled to occupy/ use trust-owned UK real estate or to any income generated by it. 

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

By a collective investment scheme (CIS)

Modest 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 to the corresponding 15% SDLT rate on acquisition if they invest in high value UK residential real estate. From 1 April 2021, SDLT on acquiring residential property in England and Northern Ireland is proposed to increase by 2% if the CIS is non-UK resident. T

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 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 annual 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 properties have conditions restricting sub-letting, particularly 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 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. 

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. 
  • Draft legislation published in summer 2018, and intended to take effect from early 2021, will require all non-UK corporate entities which intend to acquire UK land (or already do so) to register with Companies House, unless already on an equivalent register and provide the details of beneficial owners with more than 25%. Failure to do so, will incur both civil penalties and being prevented from registering transfer of the UK real estate. 
  • 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. More trusts will be required to register on the TRS, especially non-UK trusts, after March 2020. Final regulations (and accompanying HMRC guidance) are though still not yet available, so a great deal of uncertainty remains on what additional trusts will be affected by this change.

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. 

More information

For more information regarding real estate structuring options, please contact our expert listed below.

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