UK taxes on an individual neither resident nor domiciled in the UK who acquires, holds and/or disposes of UK real estate.

Residence

Many countries have a statutory test of residence. The UK is planning to bring in for the first time, from 6 April 2012, a statutory residence test which would determine whether an individual is resident in the UK for tax purposes or not. One should always bear in mind an individual can be resident in two different jurisdictions or more at the same time for tax purposes.

Until 5 April 2012 residence rules in the UK are affected by decisions taken in the UK courts, HM Revenue & Customs guidance and practice. Simply put, an individual is resident in the UK if they spend the majority of their time in the UK year on year, particularly if they live and work here. An individual is not resident in the UK for tax purposes if their life and work is not here and they do not spend time in the UK of more than 183 days in any 12 month period, and do not anticipate spending an average of 91 nights a year in the UK on a rolling three year test. You may also be regarded as resident in the UK if you are a perpetual visitor to the UK and come here for settled purpose.

Domicile

In UK tax domicile is a concept which has an impact on an individual's income tax, capital gains tax and possibly inheritance tax position and it is not based on where they live. An individual acquires a domicile of origin at their birth and they acquire that from their father, assuming he is alive at their birth. He, in turn, acquires it from his father and so on. If, say, an individual is born in Sweden and is fifth generation Swedish and then comes to the UK for residence for some years, he would normally be regarded as UK tax resident but not UK domiciled.

People who are UK resident but are not domiciled in the UK are either taxable on income and gains that arise outside the UK to the same extent as those that arise in the UK, with credit for any overseas tax thereon, or on the alternative remittance basis, whereby they can elect, subject to loss of certain reliefs or charges, to be taxed only on income and gains that arise outside the UK when they remit or enjoy them in the UK.

Save where their unremitted overseas income and gains are trivial, non-domiciled individuals over 18 who have been UK resident for 7 out of the previous 9 years have to pay £30,000 a year for the privilege of relying on the ‘remittances’ basis of taxation. This is to increase from 6 April 2012 to £50,000 for those who have been UK resident for 12 years.

On the purchase of a property in the UK, stamp duty land tax (SDLT) is payable. This is on a sliding scale from as low as nil (up to £125,000 purchase cost) to 5% for properties costing over £1 million. There is no value added tax (VAT) chargeable on a supply of residential property. There are no other taxes to consider on the purchase.

TAXES ON SALE - UK residential real estate

If the property is held as a passive investment (not being held for property development etc) by an individual not resident in the UK there is no UK capital gains tax on the sale.

TAXES ON ACQUISITION – UK non-residential real estate

SDLT is payable on the purchase, at rates up to 4%. VAT at 20% may also be chargeable. If the property is a freehold acquired less than 3 years after construction VAT will be chargeable. Otherwise, the seller may have opted to charge VAT (because he is then able to reclaim VAT charged to him).  However, in either case, VAT may not apply if the purchase constitutes the supply of a property letting business to someone intending to continue that business or is sold as part of the assets of a business transferred as a going concern, and the buyer fulfils certain conditions.

As with residential property, if the property is held as a passive investment (not for property development etc) by an individual not resident in the UK, there is no UK capital gains tax on the sale. The seller may have to charge VAT on the sale, as described above and later, and account for such tax to H M Revenue & Customs (HMRC).

Any rental income is taxable in the UK irrespective of where the owner of the property lives. Income tax on the rents, net of deductible expenses, is subject to income tax at from 20% to 50% (that top rate being reached if the owner’s annual UK income exceeds £150,000). The expenses deductible in arriving at the profit include local property taxes, insurance, repairs, rental agents’ commission, etc, but not depreciation or capital expenditure. If the property business is financed by a loan the interest on that loan is also deductible as an expense. In certain cases, if the loan is secured from an overseas lender, UK tax must be deducted at source in paying the interest.

VAT is not normally chargeable on rents from residential real estate; the exception being holiday property, as defined. VAT is chargeable on rents from non-residential property if the owner has opted to charge VAT. He may have done so to avoid being charged VAT on buying the property.

Any VAT charged on rental income is paid over to HMRC after deducting VAT incurred on associated costs.

Taxes on holding UK Real Estate

Wealth tax

There is no wealth tax in the UK.

Inheritance tax

For non-domiciled individuals there is, however, a tax on certain lifetime gifts of UK property and on UK property held at death, subject to a number of reliefs and exemptions. This tax, on both gifts and the estate at death, is termed inheritance tax. Tax at 20% is chargeable on lifetime gifts of UK property in excess of £325,000 (other than outright gifts to individuals), ignoring such gifts more than 7 years earlier. Thus gifts of up to £325,000 may be made every 7 years without inheritance tax being chargeable. Gifts to individuals, termed ‘potentially exempt transfers’ (‘PETs’), are only taxable if the donor dies within 7 years. On death, inheritance tax is chargeable on the aggregate of (i) the net UK assets held at death, (ii) any PETs within the preceding 7 years, (iii) any other gifts within that period and (iv) any UK assets given away which the donor still ‘enjoys’ or has ‘enjoyed’ within the preceding 7 years, to the extent that aggregate exceeds £325,000, with credit for any inheritance tax charged on lifetime gifts in those 7 years. Gifts and bequests to a spouse or civil partner are exempt, as also are those to a qualifying charity. Other reliefs include 100% (or in some cases 50%) relief on agricultural and business property, as defined. Real estate held as an investment will not qualify for this relief.

Business rates

Business rates are payable each year (ending 31 March) by the occupier of non-residential property or, if empty, by the owner. The current rate is 42.6% (42.8% for Wales) of the estimated rental value of the property as at 1 April 2008.

Value added tax (VAT)

VAT is a tax on supplies. Those carrying on an economic activity, which includes those who supply real estate, whether selling or renting out, must register with HMRC if they make supplies subject to VAT above the registration threshold (currently £73,000). When they do, they pay over to HMRC the VAT charged less the VAT charged to them on associated supplies to them. Generally, therefore, VAT is neutral for landlords of non-residential real estate. It is a tax on consumers. As mentioned earlier, there is generally no VAT on supplies of residential real estate, so any VAT charged on repairs, letting commission, etc is an added cost.

Strategies

The purchase of UK real estate may be financed by borrowing; the debt then being deductible in arriving at the value of assets in the UK subject to inheritance tax.

Often a non resident will hold UK real estate through a non UK company. The benefits of this are:

• For inheritance tax purposes the shares in an offshore company are not UK-situs assets. So no inheritance tax is chargeable on them if the shareholder is not domiciled
• A non resident company is charged to income tax in the UK on its rental profits at only 20%.
• If an individual thought he or she might become resident in the UK at some point in the future, action to shield from UK capital gains tax any gain already accrued than if the real estate were held directly is made simpler.
• If there were a possibility of a non-domiciled individual becoming UK domiciled, perhaps only because of becoming UK resident for 17 years, so that their world-wide assets become exposed to inheritance tax, it is easier to take action to enable offshore assets to remain excluded from an inheritance tax charge.

Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.