UK inheritance tax (IHT)
UK residential property, however owned, has with very limited exceptions since April 2017 been within the scope of IHT. Exceptions include where a company is “non-close” or if close, if the holding is below a set percentage limit. It is though still possible for non-UK domiciled individuals and trusts established by them to hold UK commercial property IHT-free via a non-UK company.
UK real estate used for a trade or business, including farming, may be eligible for IHT business or agricultural reliefs. A business of letting UK real estate is only eligible for IHT relief in limited circumstances where other services are provided.
Where borrowing is used to acquire UK real estate, this can reduce its taxable value for IHT. Certain conditions must be met for debt to reduce a property’s IHT value.
If gifts are made of UK real estate (or of shares in companies which hold it), there can be IHT charges, both immediate and afterwards, especially if the person making the gift retains an ongoing right or benefit. The UK rules concerning this are complex and expert advice should be taken if such gifts are contemplated.
UK capital gains
Non-resident owners of UK real estate used not to be subject to UK tax on UK real estate-related capital gains. This exemption has been steadily eroded and now UK net real estate gains are taxable in almost all circumstances when realised.
Certain non-sale disposals do not trigger a capital gain but instead the recipient acquires the transferor’s Capital Gains Tax (CGT) "base cost” and history for any future disposal. This treatment can apply to transactions between married couples and between companies in a CGT group.
Non-UK companies have since 6 April 2020, like UK companies, bene taxed to 19% corporation tax (CT) on any taxable gains from both UK commercial and residential property. This rate is due to increase to 25% from 6 April 2023.
Property funds from April 2019 have had the option of being taxed on UK property gains as a company or being “tax transparent”, so that these are treated as those of the investors instead.
Also, from April 2019, gains on disposals of shares in 25%+ holdings in companies 75% or more of whose value is derived from UK real estate have been liable to tax, even for non-UK residents. These “property-rich company share” gains are taxed to CT for corporate shareholders otherwise to CGT.
Non-company taxpayers instead pay CGT on any realised gains after allowable deductions and available CGT allowances at their marginal rate of tax which can be up to 28% for directly held residential real estate and up to 20% for directly held commercial real estate and property rich company shares.
Legal and other costs of acquiring, improving, preserving and disposing of UK real estate are usually deductible against realised gains for CGT and CT.
For UK real estate acquired before 6 April 2015 by non-UK residents, it is possible to substitute the value on that date as the “base cost” in place of the actual costs up to that date. For CT, acquisition and other expenditure up to December 2017 can also qualify for indexation relief.
Where UK property is let out, any rental income (after deductible expenses and any available tax allowances) is subject to UK tax, regardless of the residence or domicile of the recipient.
If both UK and non-UK properties are let, they are treated as two separate rental businesses, with expenses for one not able to offset the taxable income of the other.
Non-UK companies have from 6 April 2020, like UK companies, been taxed to 19% corporation tax on any taxable income from both UK commercial and residential property place of 20% income tax previously. The corporation tax rate will increase to 25% from 6 April 2023.
All other taxpayers pay income tax on any rental income, which after deductions and any available income allowances, can be up to 45%.
“Revenue” expenses wholly and exclusively incurred by a rental business are deductible for tax purposes. There are though certain restrictions, such as "wear and tear" on furnished lettings only for actual expenditure and on loan interest. Depreciation is only available (in the form of “capital allowances”) for corporation tax on rental income from commercial properties.
Loan interest and UK-property holding companies dividends
Interest from loans used by the borrower to acquire UK real estate can be subject to UK income tax even if the lender is non-UK resident. There are certain exceptions but specific advice on these should be taken on liability in principle (and if so, the rate of UK tax) depends on the facts of each case.
Most non-UK residents are not liable to UK income tax on dividends received from companies, including UK companies.
However, there are exceptions, especially for certain types of non-UK resident trust. Again, specific advice should be taken on liability in principle (and if so, the rate of UK tax).
Filing and paying tax on rental income/UK property-related gains
There are different UK tax compliance regimes companies and other taxpayers.
The deadline for filing a CT tax return is 12 months after the end of the company’s accounting period which it covers. The deadline to pay the CT is usually 9 months and one day after the end of the accounting period.
Non-UK companies which do not otherwise pay CT (for example the property is not rented out) but realise a one-off capital gain subject to CT) must register with HMRC to file a return online within 3 months of the disposal, with any CT due payable within 3 months and 14 days of the date of disposal
These include individuals, trusts and estates.
Rental income is returned in an annual self-assessment tax return (SATR). The deadline for filing an online tax SATR (and paying any tax due) is the 31 January following the end of the tax year in question (which runs from 6 April to 5 April). The deadline for filing a paper SATR is 3 months earlier, i.e. by the 31 October following the end of the tax year.
Advance payments of the following year’s tax can be required if more than a certain amount of income is received without tax being deducted from it.
Capital gains on disposals of directly held UK residential and commercial real estate and of shares in UK-property rich companies are also included in the SATR but in addition a “non-resident capital gains tax” (“NRCGT”) return must also be completed and filed within 60 days of completion, with very few exceptions, even if there is no gain or tax due as a result. Any CGT due must also be paid within this 60-day period. Before an NRCGT return can be filed, the taxpayer must register online with HMRC.
The UK tax authority, HMRC, is planning for anyone with £10,000 or more in annual UK rental income before expenses to become subject to the UK Government’s “Making Tax Digital” (MTD) initiative from 6 April 2024. MTD will require taxpayers to keep their tax records digitally and make quarterly filings.
Stamp and duty land tax (SDLT)
SDLT is potentially payable by anyone who acquires real estate in England or Northern Ireland in return for money or something else of value, such as assuming liability for a debt. There are similar (but not identical taxes) for real estate located in Scotland and Wales. The following comments on SDLT only.
There are special SDLT rules, including for trusts, companies (especially for transactions with those connected with them), exchanges of land, gifts and non-commercial transactions, transactions in connection separation and divorce, when a lease is cancelled or created and when leaseholders exercise collective enfranchisement rights against a freeholder.
There are several rates of SDLT. The rate for commercial and “mixed” use properties is different from that for residential properties. The SDLT rate for residential properties can be higher if a company acquires this or if the acquirer already owns other residential property.
From 1 April 2021, a 2% surcharge applies to any acquisition of residential real estate if there is at least one non-UK resident acquirer. This surcharge also applies to UK incorporated companies if they have non-UK shareholders as well as to non-UK companies, individuals, partnerships and trusts.
The meaning of non-UK residence for this surcharge is different from other UK taxes. This and other surcharge rules (including on exceptions from it) are complex.
SDLT (and the equivalents in Scotland and Wales) is a complex tax and advice should be taken to ensure the correct amount is paid and whether any of the reliefs available.
Annual tax on enveloped dwellings (ATED)
ATED is an annual tax which has applied since 2013 for high-value (currently more than £500,000) UK residential properties held by companies, partnerships with at least one corporate partner or by collective investment schemes.
ATED is due unless an affected property is used for an exempt purpose and a claim is made for the relevant exemption (both after acquiring that property and thereafter every year).
There are several ATED rate bands, with properties worth over £20 million paying £244,750 in the ATED year 1 April 2022 to 31 March 2023. Also, where a property is acquired which will be subject to ATED, SDLT is payable at a special 15% flat rate (17% if the 2& non-resident surcharge applies).
Value added tax (VAT)
VAT does not usually apply to transactions involving UK residential property, although there are exceptions such as on certain property-related services. In contrast, UK commercial property is often “elected” to VAT. If so, VAT is usually due on rental income from it and when it is sold, although there are exceptions.
The UK VAT compliance regime is separate from that for income and gains. It was the first UK tax to be subject to MTD
From April 201, MTD VAT has been mandatory for VAT registered businesses and organisations (including sole traders, partnerships, limited companies, non-UK businesses registered for UK VAT, trusts and charities) with taxable turnover above the VAT threshold (currently £85,000)
From April 2022, MTD VAT is mandatory for all VAT-registered businesses and organisations.
Double tax treaties (DTA)
There are two main types of DTA which the UK has with other countries of which 10 are for “estate taxes" and over 130 in relation to taxes on income and / or capital gains.
In almost all circumstances, these do not prevent the UK from taxing net rental income or gains realised on disposals of UK real estate or from levying IHT on UK residential real estate. However, they can provide relief from double taxation in many circumstances.
Where an individual, company (or more rarely trust) is tax resident under local law both in the UK and in another country which have a DTA between them, it usually contains rules to determine in which of those two countries the taxpayer is resident for the purposes of the DTA.
Some non-UK tax and other issues
Anyone with a non-UK connection (such as residence, domicile or nationality, the last especially relevant for US citizens) thinking of acquiring UK real estate, should first take local advice.
As well as structuring beforehand, that advice should cover tax whilst holding, renting and when disposing of this and appropriate arrangements in case of separation, divorce and death - (such as a pre or post nuptial agreement and will).
There are also regulatory requirements if a property is let, such as gas and electrical safety certificates, a statutory residential deposit scheme and ensuring residential tenants have the right to be in the UK. A property management agent should be able to assist with these requirements being complied with.
Please note, this publication is intended for general information purposes only. It should not be relied on as a substitute for taking advice in particular circumstances. Neither Gateley Legal nor any other Gateley entity accepts responsibility for any loss arising from reliance on information in this publication.