UK property tax complexities for overseas investors

Changes in the UK and international tax landscape have meant that the UK is no longer seen as a clear choice to purchase real estate. 

Historically, non-residents were aware that the yields available on UK property investments were enhanced, owing to the presence of tax reliefs and exemptions. Commonly, investments have been routed through entities located in low tax (and lightly regulated) jurisdictions. While, in principle, rental income has been subject to UK income tax at a rate of 20 per cent, investors have little or no taxable income once relief for financing costs have been considered.

Going forward non-UK resident corporates will move to the more complex UK corporation tax from April 2020. While prima facie this results in a lower tax rate (ie 19 per cent going down to 17 per cent from April 2020), the tax base is likely to increase. In addition, investors will have to comply with additional rules and disclosure requirements. These include interest restrictions and anti-hybrid tax mismatch rules, which drive up cash tax costs and result in additional compliance obligations

In addition, overseas investors had for many years benefitted from no UK tax on capital gains. This has changed, starting in April 2015, when disposals of residential investments were brought into the UK tax net. Since 6 April 2019, the scope has been extended to catch gains on commercial property as well as those non-residents who may invest via an offshore property funds or similar investment vehicles, such as a Jersey/Guernsey unit trusts.  

The popular method of holding residential property through corporate wrappers is subject to the annual tax on enveloped dwellings (ATED) rules and compliance for properties valued in excess of £0.5m. Although relief for buy to lets, dealers and developers is available, when a property is occupied by the investor or their family, additional charges arise. 

Residential property investors may also suffer from a 15 per cent stamp duty land tax (SDLT) charge on acquisitions, particularly if investing through a company. Non-residents could be faced with an additional 1 per cent surcharge, based on the Government’s recent consultation. 

Since April 2017, investors that hold shares or other interests in certain offshore companies and partnerships which own UK residential property may be subject to UK inheritance tax on the death of the investor or every ten years when owned by a trust.

Reliefs and exemptions are potentially available in order to mitigate investors’ anxieties. However tax structuring may be required in order to access these and must be considered on a case by case basis, as the new rules mean that the historic (and misused) ‘one size fits all’ approach is not appropriate any more.

The bottom line is that investing in UK property may still be an attractive proposition for the foreseeable future. However, the benefit of what was a relatively straightforward and incentivised UK tax system for such investors is no longer available. Advice should therefore be taken before acquiring UK real estate.

For more information please get in touch with Adrian Benosiglio or Riaz Farooqi.

Private client compass

Private client compass

Helping you to navigate the tax landscape with a range of tax planning ideas and opportunities.