The new normal in high-value UK real estate investment from Asia: what you need to know

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The introduction of the new tax regime for high value residential property in the UK earlier this year has not dampened the enthusiasm of Asian investors wishing to acquire prime London residential real estate. Clients from the South-East Asia region continue to be attracted to the UK property market due to London’s safe haven status, the relative weakness of sterling and the strong long term performance of the market. This is further fuelled by Asian countries such as Singapore introducing measures to cool the domestic market which is driving investors away from local markets.

Clients from Asia are usually seeking to structure their UK real estate acquisitions through holding structures which offer tax efficiency and provide privacy.

Many Asian investors acquire UK property via an offshore company (which is itself often held via a non-UK trust). Corporate ownership offers confidentiality as the property is registered in the name of the company. The main tax advantages of corporate ownership are that (1) there is no UK inheritance tax exposure whereas if the investor holds the property directly the investor will potentially be subject to inheritance tax at a rate of 40% and; (2) in relation to investment property the rental income will be taxed at lower rates of income tax.

The new tax regime, which affects UK residential properties valued at over £2m which are owned by companies, partnerships or collective investment schemes, was intended to encourage investors to wind up offshore corporate holding structures and discourage the use of corporate ownership for new purchases. The key features of the new regime are:

  • an annual charge (the “Annual Tax on Enveloped Dwellings” (“ATED”). The amount of the annual charge depends on the value of the property and ranges from £15,000 for properties valued at £2m-£5m to £140,000 for properties valued at over £20m. The first ATED returns had to be filed with HMRC by 1 October and where the ATED charge applies this is due to be paid on 31 October. Even where a relief applies so that no tax is payable a return must be filed;
  • a new capital gains tax charge at 28% on gains accrued post 5 April 2013; and
  • a new 15% rate of Stamp Duty Land Tax on purchases of properties for more than £2m by companies, partnerships or collective investments schemes as compared against a 7% rate for purchases made by the investor personally.

Many of our Asian clients reviewed and, where appropriate, restructured their existing property holding structures to avoid becoming subject to these charges before the new regime came into force.

Asian investors considering new property purchases will need to weigh up competing tax considerations in determining the most appropriate holding structure. In some circumstances an offshore company may still be the most appropriate structure, for example where:

  • the value of the property is likely to remain below the £2m threshold meaning the property will fall outside the scope of the new regime;
  • the property is purchased for development or trading or is commercially let to an unconnected third party as in such circumstances it is likely to be exempt from the new charges; or
  • inheritance tax protection is more important than the potential capital gains tax charge which may arise if the property is sold.

One common structure which requires particular care is where a trust owns a UK property via an offshore company and UK resident individuals occupy the property. This is a common scenario with Asian clients who often purchase a property with the intention that their child will occupy the property while studying in the UK.

In all circumstances a range of structuring solutions should be considered.

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