UK Real Estate Taxes
Current Issues | Tax | 24th October 2016
This is an overview of UK taxes on an individual neither resident nor domiciled in the UK who acquires, holds and/or disposes of UK real estate.
Like many countries, the UK has a statutory residence test which determines whether an individual is resident in the UK for tax purposes or not. One should always bear in mind that an individual can be resident in two different jurisdictions or more at the same time for tax purposes. For more detail on this, please see: www.shipleys.com/resources/issue/statutory-residence-test.
In the UK, tax domicile is a concept which has an impact on an individual's income tax, capital gains tax and inheritance tax position and 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 a UK tax resident but not UK domiciled. Currently a non-domiciliary is deemed domiciled in the UK for inheritance tax purposes once he or she has been resident for 17 out of the 20 tax years then ending.
From 6 April 2017 this is to change. Deemed domicile in the UK will apply if the individual has been resident for 15 out of the previous 20 tax years. It will also apply if the individual was born in the UK with a domicile of origin here, is resident in the UK and was resident in at least one of the two preceding tax years.
Comparable rules are to apply from 6 April 2017 for income tax and capital gains tax, save that, in the case of someone born in the UK with a domicile of origin here, the individual needs only to be resident in the current year.
Acquisition of UK Residential Property
UK residential real estate
Taxes on Acquisition - On the purchase of residential real estate in the UK (other than Scotland), stamp duty land tax (SDLT) is payable at rates up to 15%, as under.
|SDLT rates||First dwelling bought by individual or trust||Other residential property|
|Net present value of lease rents|
|Over £40,000 but not over £125,000||Nil||3%|
The lower SDLT rate applies on a replacement of the purchaser’s only or main residence within three years. The higher rate is payable by anyone who completes the sale of their home before completing the purchase of its replacement, but the extra 3% may be reclaimed if the old home is sold within three years.
A dwelling owned by trustees is treated as owned by the ‘life tenant’. One owned by a child under 18 is treated as the parent’s. An interest of over 50% in an inherited dwelling is treated as owned by the beneficiary three years after its inheritance.
Note that dwellings owned by a purchaser include those owned anywhere in the world.
There is no value added tax (VAT) chargeable on a supply of residential property.
Taxes on Disposal - If the UK real estate is held as a passive investment (not held for property development, etc) by an individual not resident in the UK, there was no UK tax on a gain realised on a disposal before 6 April 2015. But gains over market value on 5 April 2015 (or subsequent cost) realised on disposal of UK residential real estate are now subject to capital gains tax (CGT). The CGT charge is at 18% for basic rate taxpayers and at 28% for higher and additional rate taxpayers. The applicable rate will be determined by reference to the non-UK resident individual’s UK income levels for the relevant tax year. They will be entitled to the CGT annual exemption.
For more detail on this, please see: www.shipleys.com/resources/issue/CGT-non-uk-residents.
UK non-residential real estate
Taxes on Acquisition - SDLT is payable on the purchase, at rates up to 5%. VAT at 20% may also be chargeable. If the property is a freehold acquired less than three 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.
Scotland has a Land & Buildings Transaction Tax, comparable with SDLT, payable on purchases of real estate there.
Taxes on Disposal - 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 gain realised on disposal. The seller may have to charge VAT on the sale, as described above, and later account for such tax to HM Revenue & Customs (HMRC).
A new regime applies to individuals, trustees and companies (including non-residents) who realise a profit or gain from a disposal of any UK land on or after 5 July 2016 if any of four conditions is met. They are:
A - The main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of it.
B - The main purpose, or one of the main purposes, of acquiring any property deriving its value from the land was to realise a profit or gain from disposing of the land.
C – The land is held as trading stock.
D – In a case where the land has been developed, the main purpose, or one of the main purposes, of developing the land was to realise a profit or gain from disposing of the land when developed.
Where a transaction is within this regime the profit or gain is treated as profits of a trade. If a loss is sustained it is treated as a loss in a trade.
- a person realises a profit or gain from a disposal of any property which (at the time of the disposal) derives at least 50% of its value from land in the UK;
- the person concerned is a party to, or concerned in, an arrangement concerning some or all of the land mentioned; and
- the main purpose, or one of the main purposes, of the arrangement is to deal in or develop the land and realise a profit or gain from its disposal or of property deriving its value from that land…
…the profit or gain realised is treated as profits of a trade.
The only clear exemption is that a gain eligible for the main residence exemption will also escape from this regime.
UK income tax will be chargeable on individuals and trustees and corporation tax on companies, regardless of residence.
Taxes on Income from UK Real Estate
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 45% (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 save as mentioned below. If the property business is financed by a loan, the interest on that loan is also deductible as an expense (subject to possible restriction from 6 April 2017 as described below in the case of residential property). In certain cases, if the loan is secured from an overseas lender, UK tax must be deducted at source in paying the interest.
From 6 April 2016 tax relief is given against residential rental income (both furnished and unfurnished) for the cost of replacing (on a like for like basis) domestic items – ‘furniture, furnishings, household appliances and kitchenware’.
Capital allowances are available on certain capital expenditure on non-residential buildings, generally at 8%.
Under the rent-a-room scheme from 6 April 2016, up to £7,500 a year may be received tax-free from letting out furnished accommodation in your home, perhaps through www.airbnb.com, but note that VAT could arise if it is ‘holiday accommodation’ and the landlord is already personally VAT-registered.
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.
From 6 April 2017 income tax relief at only basic rate is to be given on finance costs deductible from residential property income. For 2017/18 the restriction will apply to 25% of finance costs, for 2018/19 it will be 50%, for 2019/20 it will be 75% and from 6 April 2020 it will be 100%.
Rental income includes non-monetary consideration. Thus home swaps will be caught, in theory, with VAT a possible hazard as such exchanges are normally to enable one or both of the owners to enjoy a holiday in the UK.
There is to be a new £1,000 allowance for property income from 2017/18. Individuals with property income under £1,000 will not be taxable on that income. Those with more income may either calculate their profit in the normal way or be taxed on their gross rents less £1,000.
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. From 6 April 2017, shares in offshore companies to the extent their value is attributable to UK residential property will be treated as UK property. 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 seven years earlier. Thus gifts of up to £325,000 may be made every seven years without inheritance tax being chargeable. Gifts to individuals, termed ‘potentially exempt transfers’ (‘PETs’), are only taxable if the donor dies within seven years.
Thus, on death, inheritance tax is chargeable not only on the net assets held at that time, but also on any gifts of UK property made within the preceding seven years, and in addition any UK assets given away (which the donor still ‘enjoys’ or has ‘enjoyed’ within the preceding seven years, to the extent that the aggregate exceeds £325,000 [£650,000 if this 'nil rate band' was not used at the previous death of a spouse or civil partner], with credit for any inheritance tax charged on lifetime gifts in those seven years.
Gifts and bequests to a spouse or civil partner are exempt without limit (unless the transferee is not UK domiciled and the transferor is, in which case the exemption is limited to £325,00), 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.
On a death in the year to 5 April 2018 an additional ‘residential nil rate band’ will be available of £100,000 (reduced by £1 for every £2 the estate exceeds £2 million) or, if less, the value of an interest in the home inherited by direct descendants. This is also to apply if the deceased ‘downsized’ or sold their home after 7 July 2015 and an amount equal to the sales proceeds is inherited by direct descendants. Also, a transferable allowance of £100,000 may be claimed in respect of an earlier death, thus potentially increasing the total nil rate band on a death in 2017/18 to £850,000. Both are increased on death in 2018/19, to £125,000, on death in 2019/20 to £150,000 and on death after 5 April 2020 to £175,000 (in each case reduced by £1 for every £2 the estate exceeds £2 million).
Business rates are payable each year (ending 31 March) by the occupier of non-residential property or, if empty, by the owner.
Value added tax (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 £83,000). 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.
Annual tax on enveloped dwellings (ATED)
This is a tax imposed on 'non-natural persons' such as limited companies, which own single dwellings occupied by individuals connected with the company, if the dwelling's market value at 1 April 2012 or subsequent cost exceeds £500,000. The ATED rates are as follows:
|2014/15 (£)||2015/16 (£)||2016/17 (£)|
|Over £500,000 but not over £1m||0||0||0||3,500|
|Over £1m but not over £2m||0||0||7,000||7,000|
|Over £2m but not over £5m||15,000||15,400||23,350||23,350|
|Over £5m but not over £10m||35,000||35,900||54,450||54,450|
|Over £10m but not over £20m||70,000||71,850||109,050||109,050|
From 1 April 2017 ATED will apply to single dwellings worth over £500,000 on 1 April 2017 (or costing more than that on subsequent acquisition). Thus a property bought for less than £500,000 in 2014 but now worth £550,000 will become chargeable.
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-domiciliary 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, but (as mentioned above) from 6 April 2017 it is proposed that shares in offshore companies to the extent their value is attributable to UK residential property will become subject to UK inheritance tax
- A non-resident company is subject to income tax at only 20% in the UK on its rental profits.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.