Overview of UK tax exposure for overseas investors in UK property

This article is kindly contributed by Parul Guha and the tax team at Tricor Services Europe LLP.

UK property remains a prime asset for investors worldwide. The UK government has recently introduced several changes to the taxation of land and buildings which could result in significant UK tax liabilities for the unwary investor. Further changes are proposed and it is therefore important that overseas investors are aware of their exposure to UK taxes before acquiring their prime asset.

It is almost impossible to avoid exposure to all UK taxes, but with proper planning it is possible to mitigate the exposure to some of the relevant taxes. The tax exposure to investors depends on the type of investment; whether the property was purchased to build or renovate with a view to selling the property at a profit (i.e. property developers); or whether it was acquired as a long term investment for renting out on a commercial basis (i.e. property investors). The investment structure and method of finance could also affect the overall tax exposure.

Previously most property investors (both overseas and UK) would typically purchase shares in a company that owned a residential property to avoid UK Stamp Duty Land Tax (“SDLT”) and Inheritance Tax (“IHT”). This led to the introduction of the annual tax on enveloped dwellings (ATED) in April 2013 and an increase in the SDLT rate to 15% (from 4%) to deter investors from using this form of planning (see below for further details on ATED). In addition, the company owning the residential property is now subject to ATED capital gains tax at a rate of 28% on the disposal of the property (however relief for ATED is available). From 6 April 2015, non- resident individuals will also be taxed on the gain on disposal of their property investment at 18% (on gains up- to £31,865) and 28% if the chargeable gain exceeds this amount. The risk of being taxed excessively and not just at company level but also at shareholder level is significant.

Tax planning is therefore even more important now than before.

Tax exposure for overseas investors investing in UK land and property

Tax Exposure Summary Table

Capital gains tax rates

Capital Gains Tax Rates

2 Note an annual exemption of £11,100 for individuals and £5,550 for Trustees may be available.

Income tax rates

Income Tax Rates

An individual may be entitled to a tax free personal allowance (of £10,600 from April 2015) in certain circumstances. If so, the first £10,600 of the property income would not be subject to UK income tax.

Corporation tax rates

All UK companies and permanent establishments of overseas companies are taxed at 20% on their UK profits from 1 April 2015.

Stamp Duty Land Tax (SDLT) rates (from 4 December 2014)

SDLT Rates

Annual Tax on Enveloped Dwellings (ATED)

ATED is a charge levied on high-value residential property (dwellings) in the UK held by a non-natural person (typically a company) for a non-commercial purpose. The charge is applicable to dwellings valued at over £2 million. However, this threshold reduces to £1 million from 1 April 2015 and £500,000 from 1 April 2016 (see tax rates below).

ATED Rates

Inheritance Tax

IHT Rates

Parul Guha, the author of this article, can be contacted by email at parul.guha@uk.tricorglobal.com or by telephone on +44 20 3216 2000. Jane Jia can be contacted by email at jane.jia@uk.tricorglobal.com or by telephone on +44 20 3216 2000.