Investing In Buy-to-let Property In The UK - Taxation

1. Taxation and reporting of rental income received by an individual and the company: 

The tax rate you pay on rental income and the process of reporting of rental income will all depend on the type of ownership that you have on your UK property.  For example, Russian investors usually choose to own buy-to-let properties as an individual or a company. 

1.1 Income Tax rates, individual vs company

The UK income tax rate for individuals receiving rental income in the UK differs from the tax rate in Russia.  The UK income tax rate is progressive.  The tax is charged at 20%, 40%, and 45%, depending on the rental income profit received.  For example, if your profit from rental income is £50,000, then the first £37,700 will be taxed at 20%, and the remaining £12,300 will be taxed at 40%. Income above £150,000 will be taxed at 45% 

Before April 2020, non-resident companies that hold a UK property business or have other UK property incomes were within income tax regimes.  The rental profits have been subject to 20% income tax.

As of April 2020, non-resident companies have been moved from the income tax regime to the corporation tax regime.

While this brings a reduction in the current applicable tax rate from 20% to 19%, the changing landscape means that NRLs now face heavier compliance burdens and a raft of more complex rules which can significantly impact the overall effective tax. 

1.2 Personal Allowance (DTT) 

Although the tax rate for individuals is higher, you should keep in mind that in the UK, you can benefit from UK Personal Allowance (£12,570 in 2021/22). As per the current UK/Russia Double Tax Treaty agreement, tax residents of Russia receiving income in the UK can benefit from UK Personal Allowance.  This means that you won't pay tax on the first £12,570 of your profit.

1.3 Reporting

The reporting of income received from a rental business in the UK for individuals is relatively straightforward.  This can be done by completing the Self-Assessment regime and  submitting a personal tax return once a year.

As non-resident companies receiving income in the UK have been moved to the corporation tax regime, they must now follow the reporting requirements for corporate bodies, which are more complex than reporting requirements for personal tax returns.

1.4 Reporting 

In the UK, the tax year runs from 6th April of one year to 5th April of the following year (for example, the tax year would start on 6th April 2020 and end on 5th April 2021). The rental income is reported on the Self-Assessment tax return annually. The tax is payable on the rental profits after deduction of the expenses such as:

• general maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop).
• water rates, council tax, gas, and electricity.
• insurance, such as landlords' policies for buildings, contents and public liability.
• costs of services, including the wages of gardeners and cleaners.
• letting agent fees and management fees.
• legal fees for rental let of a year or less, or for renewing a lease for less than 50 years.
• accountant's fees.
• rents (if you're sub-letting), ground rents, and service charges.
• direct costs such as phone calls, stationery, and advertising for new tenants.
• vehicle running costs (only the proportion used for your rental business), including mileage rate deductions for business motoring costs.

2. ATED for the UK residential properties owned by the companies

Another important aspect to be mentioned is the Annual Tax on Enveloped Dwellings (ATED).  If you decide to own the property through the company, you need to be  aware of ATED reporting requirements and taxation.  If the residential property value is above £500K, the ATED report will  need to be submitted, and tax will potentially need to be paid to HMRC annually. 

The tax liability depends on the value of the property:

Property value Annual charge

More than £500,000 up to £1 million £3,700

More than £1 million up to £2 million £7,500

More than £2 million up to £5 million £25,300

More than £5 million up to £10 million £59,100

More than £10 million up to £20 million £118,600

More than £20 million £237,400

There are several exemptions from being liable to ATED.  The exemptions include property rental and development business.  However, the report must be submitted to HMRC even if no tax is due.

3. Capital Gain Tax (CGT)

3.1 Direct disposal

Suppose a non-UK resident individual is selling residential property in the UK.  In that case, they must report to HMRC within 60 days of disposal and pay capital gain tax (if applicable) to HMRC.  Gains realised on disposal of residential property will be subject to capital gains tax at 18% or 28%, depending on individuals' marginal rate.  Non-resident companies will be subject to corporation tax at 19%.

However, individuals who are tax residents in Russia may benefit from the Annual Exempt Allowance (£12,300 in 2021/22) if agreed by the Double Tax Treaty between the UK and Russia.

3.2 Indirect disposal

The indirect disposal rules will apply to a person who makes a disposal of an entity with at least a 25% interest, where that entity derives 75% or more of its gross asset value from UK land.  Disposals of interests in entities where the property is used in a trade are excluded from the charge, subject to certain conditions being satisfied.  From 6th April 2019, the  non-resident capital gain tax scope was extended to cover all direct disposals of UK property and land and indirect disposals of UK property or land.  Indirect disposal occurs when a non-resident sells or disposes of their interest in an asset that derives 75% or more of its gross value from UK land.  You must have at least a 25% interest in that asset for the sale or disposal to be indirect disposal.

An example of indirect disposal would be the sale of shares in a UK property rich company.  A company is UK property rich if 75% or more of the gross asset value of the company is UK land.  If you sell shares in a UK property rich company in which you have an interest of 25% or more, you have made indirect disposal.

4. Inheritance Tax (IHT)

The UK inheritance tax is charged on the individual's death on their UK assets, whether they are non-UK tax residents or non-domiciled in the UK. The UK IHT is charged at the rate of 40%.  An individual's estate is entitled to a Nil Rate band of £325,000, which means that the first £325,000 will not be taxable.  There are many factors that you should consider when purchasing buy-to-let property.  At Hawksford, we are keen to assist you with preparing and submitting all necessary reports to HM Revenue and Customs.    

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.