UK Real Estate Taxes
Current Issues | Tax | 1st May 2019
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. A non-domiciliary is deemed domiciled in the UK for income tax and capital gains tax if he or she has been UK resident for 15 out of the preceding 20 years or was born in the UK with a domicile of origin within the UK and is currently UK resident. A non-domiciliary is deemed domiciled in the UK for inheritance tax purposes if he or she has been resident for 15 out of the preceding 20 tax years and is UK resident for a least one of the four tax years then ending.
Acquisition of UK Residential Property
UK residential real estate
Taxes on Acquisition - On the purchase of residential real estate in England and Northern Ireland, stamp duty land tax (SDLT) is payable at rates up to 15%, as under. Scotland has a Land & Buildings Transaction Tax, and Wales has a land Transaction Tax, comparable with SDLT, payable on purchases of real estate there.
SDLT rates are on the slices of consideration, 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 first £125,000||0%||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.
VAT at 20% may also be chargeable. If the property is a freehold acquired less than three years after construction, VAT will be chargeable at 0%. 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.
Taxes on Disposal -
Individuals (including non-residents) who realise a profit or gain from a disposal of any UK land on or after 5 July 2016 are subject to tax as if on a trading profit 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.
Furthermore, if ...
- 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 elibible for the main residence exemption will also escape from this regime.
UK income tax will be chargeable.
Capital gains tax -
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 subject to capital gains tax (CGT). For disposals after 5 April 2019 this was extended to gains realised on non-residential real estate. Furthermore, it applies to gains realised on disposal of 'substantial' interests in 'UK property-rich' companies.
An interest is 'substantial' if the person making the disposal (together with those 'connected' with that person) owns at least a 25% interest, or held such an interest within the preceding two years.
An entity is 'UK property-rich' if at least 75% of the value of its assets is represented by interests in UK land (disregarding land that is used in the entity's trade) after deducting liabilities relating to assets other than UK land.
For disposals of UK residential land, the tax charge is based on the gain over market value at 5 April 2015 (if held then) or cost. Otherwise the tax charge is based on the gain over market value at 5 April 2019 (if held then) or subsequent cost. The CGT charge is at 18% for basic rate taxpayers and at 28% for higher and additional rate taxpayers. The applicable rate for a non-UK resident individual will be determined by reference to the 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.
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 restriction 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.
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, 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 applied to 25% of finance costs, for 2018/19 it was 50%, for 2019/20 it is 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.
Individuals with property income under £1,000 are not 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. Shares in offshore companies to the extent their value is attributable to UK residential property and debts financing such property are 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 made 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. An additional 'residential nil-rate band applies if a home is left to descendeants. 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.
On a death in 2019/20 this is £150,000, and will be £175,000 on a death thereafter, increased by any such amount unused at the previous death of a spouse or civil partner, but these figures are tapered if the estate of the deceased exceeds £2 million, being reduced by £1 for every £2 of the excess.
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 a lifetime cumulation of £325,00). Also exempt are gifts and bequests to certain political parties and 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 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 £85,000). 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.
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. In the case of residential property, the benefit of this has been much reduced because, the shares in an offshore company are not UK-situs assets (so that no inheritance tax is chargeable) shares in offshore companies to the extent their value is attributable to UK residential property are subject to UK inheritance tax.
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.