How you own property can affect the tax treatments.
Given the raft of recent changes to the taxation of UK residential property, all buyers or owners of such properties should consider carefully if the way they buy and hold UK property is the most tax efficient. The comparative taxation of the 3 main ways of owning UK residential property is set out below:
Property owned personally
This is the most common way of holding UK property, and it can be the most tax efficient, depending on the owner’s particular circumstances. Income from UK property is UK-source income and is subject to UK tax wherever the owner is tax resident, subject to the provisions of any double tax treaty between the UK and the country of residence. A UK tax return is likely to be required, even if it is only to claim treaty tax relief on the income, although many treaties give taxing rights to the country where the property is situated.
UK tax residents are liable to capital gains tax (CGT) on the disposal of UK properties, however, full CGT relief can be claimed on a disposal if it can be shown that the property has been the owner’s principal private residence (PPR) for the entire ownership period. There are further extensions to PPR relief for periods of absence and periods where the property has been let. The property will normally form part of the owner’s estate on death, so could have a liability to UK Inheritance Tax (IHT) of up to 40%, unless it is an exempt transfer (e.g. to spouse) or is passed through a lifetime transfer.
For non-UK tax residents, CGT may be payable on gains arising on UK property from 6 April 2015 (previously non-UK tax residents were outside the scope of UK CGT). PPR relief has been extended to non-UK tax residents, where they have spent at least 90 days in the property for each year when not UK tax resident. The 90 days can be split between husband and wife and the property can be their PPR in the UK but need not be their main residence in the world. Under these rules, care must be taken to avoid becoming UK tax resident for those years under the Statutory Residence Test.
Non-UK resident taxpayers disposing of a UK property need to report the disposal on a NRCGT return and pay any CGT due to HMRC within 30 days of the day after the date the property sale is completed. If the taxpayer is within the UK self-assessment system, they can delay the payment until the normal due date (31 January following the end of the tax year of disposal), but a NRCGT return is still required within 30 days.
As the Annual Tax on Enveloped Dwellings (ATED) charges and 15% rate of stamp duty land tax (SDLT) only apply to companies and other non-natural persons; individuals owning UK property should not need to worry about ATED charges, and only pay SDLT on residential property at marginal rates up to 12%, where the property is worth over £1.5 million.
Property owned through a company
HMRC have targeted the ownership of UK properties through companies in recent years, resulting in the possibility of significant tax charges arising on such structures The ATED currently applies an annual charge of up to £218,200 on Companies or NNPs that own UK residential properties owned by worth over £1m; From 1 April 2016 the charges will apply to UK residential properties over £500,000 in value. There are reliefs available including where property is held by companies for property development, rental and trading businesses.
SDLT (Stamp Duty Land Tax) at a rate of 15% for purchase of UK Property over £500,000 in value by a company is payable within 30 days of completion by the buyer. Again, there are reliefs that include where the property is purchased for a property development, rental or trading business.
Income from UK properties is subject to UK tax, and companies are also subject to the same capital gains calculations as are made on disposals of UK properties, however, corporation tax is payable by companies on the income and gains from the properties instead of income tax and CGT for individuals and trusts.
The application of capital gains tax to non-UK tax residents in respect of UK property also applies to some offshore companies from 1 April 2015. If the company would be a close company in the UK (controlled by 5 or fewer persons) it is subject to CGT on the indexed chargeable gain at a rate of 20%, after any reliefs.
PPR relief is not be available for companies, therefore if such relief would be available if held by an individual or a trust then holding that property through a company is unlikely to be tax efficient.
Using a company to hold UK property may still be beneficial for some overseas owners since it can provide protection from UK IHT, but other structures can afford similar protection without incurring increased SDLT rates and ATED charges.
Property ownership through a Trust
All trusts, regardless of residence, are subject to UK tax on income and gains arising from UK property.
UK trusts are subject to CGT on disposals of property, and the CGT charge for non-residents on disposals after 6 April 2015 has been extended to non-resident trusts. The CGT rate for trusts is 28% and trustees are only entitled to an annual exemption at half the rate for individuals (for 2015/16: £11,100 for individuals and £5,550 for trusts). PPR relief will be available to trusts where a beneficiary meets the relevant criteria, including for for residence or the 90-day rule.
As for individuals, offshore trusts, including Qualifying Non UK Pension Schemes (QNUPS), as non-residents, are subject to CGT on UK property on gains arising from 6 April 2015. SDLT is charged to trusts at standard residential rates and ATED does not apply to trusts.
Assets held within a trust are generally outside the death estate for UK IHT purposes, however, trustees are generally subject to a ten yearly charge of up to 6% of the capital value of the property within the trust. As this charge is only calculated on the equity in the property, the trustees could choose to take out loans to purchase the property in order to reduce the equity in the property and therefore reduce the capital charges arising.
Thus, holding a UK property through a trust can give similar tax benefits and reliefs compared to holding the property personally, but can also reduce the impact of UK IHT on that property.
Property owners can transfer UK property to a QNUPS, which is a tax efficient offshore pension scheme which should fall outside the general charge to ATED and IHT. It is likely to be particularly useful where property is rented out or where PPR will not apply to a property.
If you would like any advice regarding how to hold property or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or firstname.lastname@example.org.