Finance Act 2019 introduced some quite significant changes to the taxation of UK property that is owned by non-residents.
We have set out below a brief overview of the current position and the key changes; however, we will be happy to discuss these with you in more detail as to their impact on your particular circumstances.
Currently, non-resident individuals owning UK rental property (residential or commercial) are subject to UK income tax (at 20%, 40% and/or45%) on the net profits.
There are no changes to this position in Finance Act 2019 and such individuals will continue to be liable to UK income tax, and have to submit annual UK tax returns, as before.
Capital Gains Tax (“CGT”)
Since April 2015, non-resident individuals have been subject to UK CGT on the sale of any UK residential property at either 18% or 28%, depending on the level of the gain.
When calculating the gain or loss arising on the sale, they are able to substitute the value of the property at April 2015 for the original purchase price, if this gives a more beneficial result.
An NRCGT return must be filed within 30 days of the sale completion date, with any CGT due also being payable by that date.
Finance Act 2019 extends the scope of the CGT charge to include UK commercial property for any sales completing on or after 6 April 2019.
As with CGT for UK residential property, rebasing is available with the value of the property at April 2019 substituted for the original base cost, if this gives a more beneficial outcome.
CGT at either 10% or 20% will be payable, depending on the size of the gain and, as before, the NRCGT return must be filed, and the tax paid, within 30 days of the sale completion date.
It is recommended that any individuals who own UK commercial property obtain a valuation of the property at April 2019 so that this is available should the property be sold in the future.
Inheritance Tax (“IHT”)
Non-resident individuals that own UK-situs assets, such as UK property, are liable to UK IHT on such assets, either at 20% where a chargeable lifetime transfer is made (such as transferring the property into a trust) or at 40% on death.
Lifetime gifts made to other individuals are not subject to UK IHT at the point the gift is made; however, if the donor dies within 7 years of the gift, IHT may be payable by the donee, based on the value of the asset at the time of the gift.
There have been no changes to the IHT position in Finance Act 2019.
Certain steps may be taken to mitigate the IHT charge and we will be happy to advise further on this, if required.
Stamp Duty Land Tax (“SDLT”)
Individuals purchasing UK residential property who already own another residential property (even if not situated in the UK) are generally liable to a 3% surcharge on top of the standard SDLT rates, based on the value of the property’s purchase price.
There is currently no such surcharge on top of the standard SDLT rates where the individual is purchasing a UK commercial property.
Although Finance Act 2019 makes no changes to this position, HMRC are currently consulting on whether non-UK residents purchasing UK property (whether residential or commercial) should be subject to an additional surcharge of 1% across all SDLT rates if they are present in the UK for fewer than 183 days in the 12 months up to the date of completion.
This is very much in the early consultation stages, so there is no certainty yet as to whether this will become law. However, we will be happy to discuss the proposals further, if required, to see if this may impact on your position.
Currently, non-UK resident companies that own UK rental properties (whether residential or commercial) are subject to UK income tax at 20% on the net profits and must submit an annual tax return each year.
Finance Act 2019 changes the position from April 2020 to make such profits subject instead to UK corporation tax (“CT”). The rate of CT from April 2020 will be 17%, payable 9 months after the end of the company’s account period, with the annual CT return being due 3 months after that (for large groups, payments on account are also required).
Although the rate of CT is less than the income tax rate, moving to the CT regime may impact on allowable expenditure against rental income (in particular, loan interest relief) and we will be happy to advise further on this.
Annual Tax on Enveloped Dwellings (“ATED”)
UK residential property that is owned via a corporate structure has been subject to ATED since April 2013, depending on the value of the property.
When ATED was first introduced, it applied to properties worth more than £2m. That minimum has gradually been lowered and, from April 2016, ATED has applied to all such properties worth more than £500,000.
Relief from the ATED charge is available where the property is:
- let to a third party on a commercial basis and is not, at any time, occupied (or available for occupation) by anyone connected with the owner; or
- open to the public for at least 28 days a year; or
- being developed for resale by a property developer; or
- owned by a property trader as the stock of the business for the sole purpose of resale; or
- repossessed by a financial institution as a result of its business of lending money; or
- acquired under a regulated Home Reversion Plan; or
- being used by a trading business to provide living accommodation to certain qualifying employees; or
- a farmhouse occupied by a farm worker or a former long-serving farm worker; or
- owned by a registered provider of social housing.
If the property is covered by one of the ATED reliefs, an annual Relief Declaration Return must be filed by 30 April each year.
There is no change to this position following Finance Act 2019.
Capital Gains Tax (“CGT”)
Currently, non-resident companies that dispose of UK residential property are subject to either ATED CGT, NRCGT or both on any gain arising.
Following Finance Act 2019, from April 2019 companies will instead be subject to corporation tax on such residential property gains. The rate of CT from April 2019 is 19%, dropping to 17% from April 2020, compared to the previous CGT rates of 18% or 28%.
Where the property was owned prior to April 2015, rebasing to that date is available. Note, therefore, the April 2013 rebasing previously available for ATED properties is no longer relevant. Therefore, we would advise companies that had obtained April 2013 valuations to now obtain one to April 2015.
Where the property was purchased after April 2015, the original purchase price can be rebased to April 2019.
As with non-resident individuals, Finance Act 2019 has also brought UK commercial property gains within the charge to tax. In the same way as for UK residential property, gains arising on UK commercial property will be subject to CT from April 2019.
Any CT due on the gain will be payable 9 months after the end of the company’s accounting period, with the CT return being due 3 months after that.
Note that, where a non-resident company is in receipt of UK rental income in the 2019/20 tax year and incurs a gain on the sale of a UK property in that same tax year, it would seem that both an income tax return and a CT return must be filed for that one year, as companies will straddle both tax systems.
From April 2020, both income and gains will be taxed under the CT regime.
Inheritance Tax (“IHT”)
Currently, non-resident individuals that are shareholders in an offshore company that owns UK residential property are liable to UK IHT at 20% on the transfer of the property to certain entities (for example, a trust) or at 40% on death. Unlike where the property is owned directly by the individual, it is not the value of the property at the point of charge that is used to calculate the IHT, but the value of the shares that is attributable to that property.
Finance Act 2019 does not change the position to include any share value attributable to UK commercial property so, for IHT, holding UK commercial property within an offshore company is still more advantageous than holding UK residential property.
However, whilst we are not currently aware of any plans to bring UK commercial property owned by an offshore company within the UK IHT charge, there can be no certainty that this will not happen in the future.
Stamp Duty Land Tax (“SDLT”)
Companies purchasing UK residential property are liable to a 3% surcharge on top of the standard SDLT rates, whether or not they already hold other residential property.
As with individuals, there is currently no such surcharge where the company is purchasing UK commercial property.
Although Finance Act 2019 makes no changes to the position, HMRC are currently consulting on whether non-UK resident companies – or UK resident companies that have non-UK resident participators – that are purchasing UK property (whether residential or commercial) should be subject to an additional surcharge of 1% across all SDLT rates.
This consultation is in the early stages, so there is no certainty yet as to whether this will become law. However, we will be happy to discuss the proposals further, if required, to see if this may impact on you.
Indirect Disposals of UK Property
This can affect both individuals and companies that are not UK resident.
Where the non-resident individual or company does not directly own the UK property being sold, it is necessary to check whether they will fall to be taxed under the “indirect disposals” rules.
This can arise where the asset being disposed of derives 75% of its value from UK land (a “property-rich” asset) and the individual or company making the disposal has a 25% interest or more in that property-rich asset.
As an anti-avoidance measure, it is necessary to look back 2 years from the date of disposal to determine the individual’s or company’s percentage interest. In addition, where individuals are involved, it is also necessary to take into account the interests of their spouse or civil partner, as well as lineal ancestors and descendants, again looking back over a 2 year period, not just at the point of disposal
As can be seen from the above overview, the main changes brought in by Finance Act 2019 are to CGT and CT.
Both non-resident individuals and companies will fall to be taxed on any gains arising on UK
commercial property from April 2019, individuals to CGT and companies to CT.
From April 2020, UK rental income received by non-resident companies will move to the CT regime.
The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information and we will be happy to assist in providing such advice.
Tax legislation changes regularly and the information contained herein is provided based on legislation as at 7 March 2019.
Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law.
We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.