Worldwide: UK Taxation For Overseas Investors Thinking Of Investing In UK Real Estate

Background

In our sister article: Overseas investors thinking of investing in UK real estate Dixcart Legal set out some of the legal points that should be considered by overseas investors looking to invest in UK real estate.

This article is designed to set out some of the main tax considerations for overseas investors in UK real estate but, as always, you should seek detailed tax and legal advice before entering into any transaction.

The UK tax position for non-residents (the position for UK residents is different) owning UK residential property is complex and will, to a certain extent, depend on how the property is purchased i.e. as an individual, through a company or trust.

Income tax

If a property is purchased by an individual or trust and rental income is received, then the income less any allowable expenses will be subject to UK income tax.

The rate of taxation payable will depend on the availability of any allowances, the level of rental profit and any other UK income earned by the investor, with tax rates starting at 20% and rising to up to 45%.

A UK income tax return will need to be filed by 31 January following the year of assessment i.e. UK tax year ended 5 April 2024, filing deadline 31 January 2025, and any tax payable will also be due on this date. In certain situations, payment on account of tax may be due on 31 July and 31 January.

Corporation tax

If a property is purchased by a company (either UK or overseas) and rental income is received, then the income less any allowable expenses will be subject to UK corporation tax.

The rate of taxation payable will depend on the level of rental profit, with the UK's corporation tax rate currently being 19% for profits under £50,000 rising to 25% for profits over £250,000.

A UK corporation tax return will need to be filed within 12 months of the year end to which the company makes up its accounts, and any corporation tax will be payable within 9 months and 1 day of the year end.

Please note that if it is intended that the owner of the company will live in the property there may be personal tax consequences for those individuals and advice should be sought in this respect.

Non-Resident Landlord Scheme

Where a UK property is owned and rented out by a non-resident then then there is a requirement for a 20% withholding tax to be deducted from the gross rent payable, with the withholding tax being paid to HMRC. When the letting agent collects money from the tenant, this process should be completed by them but where it is a direct payment from the tenant it can become the tenant's responsibility to deal with this payment to HMRC.

To avoid paying this withholding tax, the landlord must register with HMRC under the Non-UK Resident Landlord Scheme and apply to receive the rental income on a gross basis.

Annual Tax on Enveloped Dwellings (ATED)

As the name suggests, ATED is a yearly tax and is payable by companies that own residential property in the United Kingdom having a value of more than £500,000. An annual return is required to be made by 30 April each year to HMRC and the current ATED charges are:

There are a number of exemptions from the ATED charge including:

• Letting to a third party on a commercial basis (so long as the occupant is not related to the owner.
• Where the property is used as part of the business of a property trading or developing.
• Where the property is being redeveloped or held as stock for resale by a property developer.
• Property held by trading companies for the use of employees in the trade.

Capital Gains Tax

Capital gains tax will be payable on any profits realised in relation to UK residential property.

For individuals and trusts, gains on the disposal of UK residential property will be taxable at up to 28%.

It may be possible to exempt the gain from tax if it was the owner's, or a beneficiary of the trust's, Principal Private Residence (PPR).

For non-residents:

• You must have spent at least 90 midnights in the UK property in a relevant tax year, or
• You must have spent at least 90 days in any other UK property that you own.

In order for the property to qualify as a PPR.

For companies, there is a corporation tax charge on gains on disposals of interests in UK land (including commercial and residential property), and on indirect disposals of UK land. In relation to property disposals since 6th April 2019, companies need to register for corporation tax and may need to submit a corporation tax return to declare the disposal, and pay any tax due at the normal corporation tax rates of between 19% and 25%. There is no PPR relief available for companies.

Stamp duty land tax

Subject to limited exemptions all non-residents now pay an additional 2% stamp duty land tax (SDLT) on residential property acquisitions compared to the standard SDLT rates.

The current standard residential rates are:

Higher Rates for Additional Properties

If the purchaser already owns another residential property, which can be located anywhere in the world, an additional 3% surcharge is added to the standard SDLT rates.

The purchaser can be exempted from this additional surcharge if the property being purchased is a replacement for their existing main residence. It may, in certain circumstances, be possible to reclaim any surcharge paid, if the purchaser sells his/her previous main residence, within 3 years of the purchase of the UK property.

Rates for Company Purchasers

SDLT is charged at 15% on residential properties costing more than £500,000 bought by corporate bodies or 'non-natural persons'. These include:

• companies
• partnerships, where one or more of the partners is a company
• collective investment schemes

The 15% rate does not apply to residential property bought by a company that is acting as a trustee of a settlement.

There are certain exemptions from this e.g. when the acquisition is made for letting purposes as part of a rental business or property trading or development business, but these should be considered carefully.

Purchase of shares in a Company

Interestingly, SDLT is not payable if an individual purchases shares in a company owning UK property. Instead 0.5% stamp duty would be payable on the purchase price.

This can represent a significant saving, however, there are some possible drawbacks of investing in a company which holds UK property including; the ATED charge, possible inherent capital gains and certain other issues which may arise by purchasing a historical company. Detailed legal and taxation advice should be sought in this respect: hello@dixcartuk.com.

Inheritance Tax (IHT)

All residential property in the UK is potentially subject to UK IHT at 40%, irrespective of how it is owned.

In certain cases, an individual's debts, such as borrowings secured against the property, may reduce the amount subject to inheritance, tax but care must be taken in this respect.

One relief available, is that transfers between spouses are normally free from UK IHT (subject to certain limitations when you pass the property to the surviving spouse, who is a non-UK domiciled individual).

Given that there is little planning available for UK IHT we often see clients taking insurance to cover any IHT liability associated with the property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.