New tax measures announced in the UK Budget on 21 March 2012 will have a significant impact on the way in which non-UK residents hold and invest in UK residential property.
The proposed changes will impact on existing structures holding UK residential property - such structures should be reviewed well before 6 April 2013. Non-residential property is not affected by these changes.
The important changes are:
- an increased rate of stamp duty land tax (‘SDLT’) of 7% on all residential properties worth more than £2m - this is effective already;
- a new 15% rate of SDLT on the acquisition of £2m plus residential properties bought by “non natural persons”, whether onshore or offshore - this is also already effective;
- the introduction (from 6 April 2013) of a charge to capital gains tax (‘CGT’) at up to 28% on residential property (of any value) owned by non resident “non natural persons”; and
- the introduction (from 6 April 2013) of an annual charge on residential properties worth over £2m owned by “non natural persons” (UK or non UK).
Property value Proposed annual charge
£2m - £5m £15,000
£5m - £10m £35,000
£10m - £20m £70,000
The Government is to consult on the new CGT charge and the annual charge.
UK property currently held by a non-UK company with or without a non-UK trust
In the past, non-UK residents have often held UK residential property through a non-UK company for a number of reasons:
- non-UK tax resident companies holding UK property as an investment only pay tax at 20% on the net rental income;
- if a non-UK domiciled individual holds UK property through a non-UK registered company no liability to UK inheritance tax will arise in connection with the property whilst he remains non-UK domiciled (and not deemed domiciled);
- any gain realised when a non-UK resident company sells UK residential property, which was held as an investment, should not be taxed in the UK;
- no SDLT is payable on the purchase of shares of a non-UK resident company.
From April 2013, there will be an annual charge based on the value of the property and a CGT charge on a disposal of the property by the company.
It appears that it will still be possible (even post April 2013) to sell the shares in a non-UK resident company which holds UK residential property without paying any stamp duty or SDLT, so preventing the new CGT charge that would otherwise arise on a sale of the property. However, it is likely that any purchaser will want a discount to take account of the latent gain in the property and the fact that they will have to pay the new annual charge.
The UK Revenue intends that the proposed CGT charge will be imposed on disposals by non-UK resident trusts as well as non-UK resident companies. Under the SDLT changes, the term “non natural persons” does not include companies which are trustees of settlements, in certain circumstances. However, it seems that in relation to the new CGT charge non resident trustees and foundations will be caught.
The new charges are designed to encourage investors to unwind structures in which UK residential property is held through a non-UK company, and to hold that property directly. In some cases, unwinding existing structures, particularly those involving non-UK companies owned by offshore trusts, may trigger a charge to CGT or SDLT under existing rules and advice should be sought long in advance of April 2013.
Until the proposals are finalised no action should be taken to unwind existing structures. It would, however, be prudent for individuals and trustees to identify structures which may be affected and to seek specialist advice.
New purchases of UK residential property
Specialist tax advice should also be sought on any planned purchases of residential property in the UK in the near future, whether for investment or for personal use.
The new punitive 15% rate of SDLT only applies to new acquisitions of residential property worth in excess of £2m by a non natural person and is clearly intended to deter people buying UK property through companies (UK or non-UK) in the future. Any other purchase of UK residential property worth in excess of £2m will incur SDLT at 7%.
Corporate ownership will still provide benefits in terms of income tax and inheritance tax. For properties worth less than £2m the 15% rate of SDLT will not apply and there will be no annual charge, although the CGT charge would still apply to non-UK companies. The new annual charge and the proposed CGT charge will not apply where UK residential property is purchased in personal names. However, there are disadvantages.
Where the property is rented out, income tax is payable at a maximum rate of 50% (45% from April 2013) on the net rental income. However, the taxable rent can be reduced by interest paid on third party finance taken out to acquire the UK property.
UK property held directly will be subject to UK inheritance tax on death (even if non-UK domiciled and not deemed domiciled). It is possible to reduce the amount subject to inheritance tax by taking out borrowing secured against the property, or insurance can be obtained to pay inheritance tax due on death. Care needs to be taken where the borrowing is not from a third party to ensure that the debt is deductible in valuing the individual’s estate for tax purposes.
If confidentiality is important, the property could be purchased through a nominee.
Another option is to use a non-UK resident trust, which should not be subject to the 15% SDLT charge or the annual charge. The income tax and inheritance tax issues which arise with personal ownership remain, but a trust gives some additional flexibility, whilst providing asset protection and confidentiality benefits and avoiding the need for the property to be dealt with by Will and probate. In addition, any borrowing taken out by the trustees should reduce the taxable value for inheritance tax purposes. Certain reliefs from CGT which are available to individuals may also continue to be available where (non-let) residential property is held in trust in particular circumstances.
A limited liability partnership (‘LLP’) may be another option for non-domiciled investors. Subject to certain conditions, the new CGT and annual charges should not apply. A LLP may also provide inheritance tax protection in some circumstances.
Some points to bear in mind
The proposals are not final and no steps should be taken to unwind existing structures until the final details of the new rules are known.
If re-structuring is required it should, in many cases, be possible to do so in a tax efficient manner.
Specialist advice should be sought for any new purchases of UK residential property.
Where UK residential property is being purchased for personal use additional considerations apply.
The tax treatment of UK property purchased for development or trading is different, and exemptions may apply.
The 15% SDLT rate, the new annual charge and proposed CGT charge only apply to holdings of UK residential property by non natural persons.
Further details of the proposals are due to be published in May 2012.