Summary of the UK taxation of UK residential property held for personal use
Over the past few years the UK government has made significant changes to the taxation of UK residential property.
In particular, companies and non-UK persons holding UK residential property have been faced with new and increased taxes on purchase, disposal and the period in between. With new legislation seemingly introduced biannually, those owning and thinking of purchasing UK residential property need to consider their tax position more carefully than ever.
Charles Russell Speechlys has expertise in handling matters with a cross-border dimension and strong links to various regions that are popular with overseas investors in the UK property market, including offices in Bahrain and Qatar. Whether you currently hold UK property and would like to review the ownership arrangements or are considering investing in the market, we can advise on the relevant tax and estate planning issues. This briefing note sets out a general overview of the key UK taxes on UK residential property held for personal use (i.e. not for letting on a commercial basis to unconnected persons), but clients should take detailed and tailored advice before commencing any transactions.
Inheritance Tax (IHT)
For UK domiciled or deemed domiciled individuals, worldwide assets above the nil rate band (currently £325,000) will be taxed at 40% on death. For non-UK domiciled individuals who are not deemed domiciled, only UK assets above the nil rate band will be taxed at 40% on death. This includes UK assets that have been given away in the seven years prior to death (although the rate of tax reduces from three years after the gift) and UK assets from which the donor continues to enjoy a benefit.
Currently, holding UK real estate through a non-UK company can offer IHT protection for non-UK domiciled individuals, as the asset held by the individual (i.e. shares in the non-UK company) will be non-UK. However, it has been announced that from April 2017 such holding structures will become “transparent” and the ultimate owner will be treated as owning a UK asset directly for IHT purposes. It is highly likely that this change will be enacted, although it is possible that the effective date of the change will be later than April 2017, as the legislative timetable has been affected by the UK’s referendum vote to leave the European Union. This prospective change means that there is not much scope for sheltering existing properties from IHT.
UK assets (including, from the date of introduction of the IHT “transparency” rule, UK residential property held via a non-UK company) which are put into trust will be subject to an up-front tax charge at an effective rate of 25% on their value above the nil rate band, and will then be subject to a 6% charge every ten years and on exit from the trust. In addition, any such assets will usually also remain within the settlor’s estate for IHT purposes (i.e. exposed to a 40% IHT charge on death).
Annual tax on enveloped dwellings (ATED)
ATED is an annual tax on high value residential property owned through non-natural persons (broadly, companies). As originally introduced in 2013, the threshold for ATED to apply was £2m, but this threshold has now been reduced so that it now applies to all properties worth £500,000 or more.
The annual charges for the 2016/17 year are set out below. Provision has been made for these figures to rise annually in line with inflation, although in previous years the increases have been significantly higher than inflation.
It has been common historically for non-UK domiciled individuals to hold UK residential property through companies. However, the introduction of ATED, combined with the prospective IHT change referred to above, now makes this unappealing.
Capital Gains Tax (CGT)
UK resident individuals are subject to CGT on all gains realised on disposals of property, typically at a rate of 28% (depending on the individual’s other income and gains). A 100% relief is available for a gain realised on the disposal of a main residence, provided that certain conditions are met. Disposals included gifts as well as sales.
UK companies are subject to corporation tax (currently 20%), rather than CGT, on gains realised on disposals of property. However, where the property is subject to ATED, (broadly) the post-5 April 2013 element of the gain will be taxed to CGT at 28%, instead of corporation tax.
Since 2013, CGT on UK residential property has been introduced in stages for non-UK residents (individuals and companies). Again, a 100% relief is available for a main residence held by an individual but this will only apply in limited circumstances (and never where the holder of the property is a company). The calculation of this CGT charge is complex, but broadly CGT will only apply to the post-5 April 2015 element of the gain (or typically the post-5 April 2013 gain for properties subject to ATED), so that there is effectively a “rebasing” of the properties to their values at this date. Generally, the applicable rate of such CGT charge is 28%.
Stamp Duty Land Tax (SDLT)
SDLT of up to 15% is payable by a purchaser of UK real estate. It can also apply when a person transfers an existing property that is subject to a mortgage or on a transfer, even for no consideration, to a closely held company.
The SDLT rate will depend on a variety of factors, including: the value of the property, the property use (i.e. residential or commercial), the number of properties included in the transaction and whether or not the purchaser is a natural person.
For an individual purchaser, the basic SDLT charge can reach 12%, depending on value. However, since 1 April 2016, purchasers of additional residential properties have been liable to pay a 3% surcharge on top of the basic SDLT charge; this additional charge catches second homes and buy-to-let properties.