UK TAX: WHAT PROPERTY INVESTORS NEED TO KNOW

15 April 2015

Recent changes to the UK tax system will have a far-reaching impact on overseas property investors. Alan Lester from accountancy firm HW Fisher and Company tells you all you need to know.

Thanks for talking to us today Alan. How do you think the UK stands at the moment in terms of taxing overseas real estate investors? 

The UK tax situation is still very favourable for those investing in property, particularly in comparison to other world markets. Some rates have risen in recent years but the UK remains a tax haven for investors who are well advised, and therefore able to understand the basic tax position and avoid the pitfalls that exist.

That sounds like good news for investors. The recent changes to the capital gains tax (CGT)  have been something of a hot topic over the past year. What are the implications for offshore investors?

The changes to the CGT were implemented on 6 April this year, and they will essentially see overseas property investors taxed at the same rate as domestic investors.

The tax applies to all individuals and companies (except those falling under the Annual Tax on Enveloped Dwellings (ATED) structure), and will only be levied on the element of gains made after April 2015, so investors needn’t worry about receiving a high tax bill based on the success of their investments so far.

In light of this, investors may want to consider arranging a revaluation of any property they hold in order to exclude growth achieved before the 6 April 2015 implementation.

What’s the ATED and who does it apply to?

First implemented in 2013, from this month the ATED applies to all residential properties valued above GBP1 million that are held by companies and other corporate structures and not rented out commercially. In April 2016 this will again change to apply to all residential properties valued above GBP500,000 held in this manner.

The ATED includes a fixed annual charge for company investors that is calculated according to the value band into which the property falls. However, offshore individuals (including joint owners) remain exempt from this charge.

At what rate will investors end up paying CGT?

As with domestic investors, there will be a GBP11,100 tax-free allowance for individual investors from overseas. Beyond this allowance, individuals will be taxed at a rate of 18% or 28% depending on their status. For companies that are renting their property out, the tax will be levied at a flat rate of 20%.

Companies falling within the ATED structure will pay tax on any gains made on residential property at the existing rate of 28%.

At what point will individual investors begin paying 28% rather than 18%?

If an investor’s overall UK income and capital gains in a year are higher than the Standard Rate Band of GBP31,785, any gains made above that level will be taxed at the higher rate of 28%.

Is there anything an investor can do to avoid paying CGT on their property?

There is the possibility for individual investors to secure an element of private residence relief. To qualify, the property would need to have been lived in by the owner for at least 90 nights in each of the years concerned. However, there are complex rules surrounding eligibility for this relief.

What about general rental income from an investment property?

All rental income arising from UK properties remains subject to UK income tax, no matter where in the world the owner is based.

At what rate is income tax currently levied?

UK income tax is calculated progressively for individuals or joint owners of a property. For the new tax year, individuals will be charged at a rate of 20% on earnings up to GBP31,785, then at a rate of 40% on earnings between that and GBP150,000. The highest income tax band currently sees income above GBP150,000 taxed at a rate of 45%, although very few overseas property investors fall into this category.

Offshore companies owning UK property pay tax on all their rental surplus at the flat standard rate of 20%.

What can investors do to reduce their income tax liability?

There are a number of allowances that can reduce liability for income tax. For property investors these include, but are not limited to: financing costs; agent fees; repair and maintenance costs; legal and accountancy fees; insurance rates; water rates; ground rent; and cleaning costs.

A UK personal tax-free allowance may also be available to individual overseas investors. This allowance has been raised to GBP10,600 for the new tax year. There are reductions to this allowance for those with very high incomes, but again very few overseas property investors will fall into this category.

Many investors will consider passing their investments on to their families rather than exiting; how does the UK handle inheritance taxation at the moment?

All property held by individuals in the UK is subject to inheritance tax, even if the owners are non-UK residents and non-UK domiciled.

How much is this likely to cost investors who want to pass property assets on to their families?

Each person currently receives a GBP325,000 tax-free allowance for inheritance tax, with all inheritance after that taxed at a rate of 40%. When it comes to property, this tax is calculated based on net equity – this is the property’s current value less any outstanding loans that were obtained at acquisition to buy it and secured against it (even if that loan was subsequently remortgaged, and even if the remortgaging was with another bank).

Is inheritance tax unavoidable in that situation?

There are a few ways that investors can reduce the amount of inheritance tax that will be charged on their estate. Joint-ownership is a very commonly-used tool, as each owner will receive the full GBP325,000 tax-free allowance.

The use of an offshore company or trust is also an option but investors should take care to seek expert advice before engaging in such a strategy.

Finally, the use of a properly drawn up UK Will can be an effective part of inheritance tax planning.

Are there any other taxes that international property investors should be aware of when entering the UK market?

Perhaps the most important tax not mentioned so far is Stamp Duty Land Tax (SDLT), which is payable upon the purchase of any property in the UK (excluding Scotland, which has this month introduced the new Land and Buildings Transaction Tax to replace SDLT).

Changes that were implemented in December 2014 have made SDLT into a fully progressive charge. It now has five bands, with each portion of the property’s value charged at a rate defined by the band into which it falls, as per the following table.

Purchase price of property

   Rate paid on part of price within each band

Up to GBP125,000

   0%

Over GBP125,000 and up to GBP250,000

   2%

Over GBP250,000 and up to GBP925,000

   5%

Over GBP925,000 and up to GBP1,500,000

   10%

Over GBP1,500,000

   12%

SDLT is also different for properties falling within the ATED structure – in that case the tax will be levied on such companies at a rate of 15% upon the acquisition of all properties valued above GBP500,000.

Established in 1933, HW Fisher and Company are a progressive, medium-sized firm of Chartered Accountants whose 29 partners and more than 300 other employees have built them into one of the UK’s top 30 accountancy firms.

Alan Lester has been a Partner at HW Fisher and Company since 1984 and is a recognised specialist in advising overseas real estate investors and landlords on all issues related to property investment taxation.

 

IP Global

Written by IP Global

IP Global’s full-service approach is built on extensive market research and analysis combined with a significant financial commitment to every investment we offer. We are able to manage the entire investment process end-to-end, from sourcing, financing, and management to those all important exit strategies, making investment in real estate as straightforward as investing in more traditional asset classes. Our expertise, experience and strong record have produced over USD2.8 billion in international real estate investments in over 30 markets worldwide.

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