Over the years, the UK property market has generated interest from foreign residents (i.e. people not resident in the UK) who continue to purchase properties in the UK for investment purposes or to occupy as holiday homes.
The trend is particularly common amongst wealthy Nigerians who very rarely seek professional advice on the tax implications of owning a UK property. The lack of advice may be indicative of the current state of the administration of the tax system and the resulting compliance requirements in Nigeria, but is no excuse for the level of ignorance shown in another country. Especially as such naivety may result in large sums of money paid as UK tax at death, despite not being UK resident.
The ownership of a UK property exposes non-UK residents to various UK taxes such as income tax, capital gains tax (CGT), inheritance tax (IHT) and Stamp Duty Land Tax (SDTL) as summarised below. During the process of acquiring the UK property, SDLT is usually paid to HM Revenue & Customs as advised by the solicitor dealing with the property conveyance. Tax planning advice that may help mitigate other taxes (as mentioned above) is not considered.
Income Tax
The net rental income received from a property situated in the UK is subject to UK income tax at rates determined by the ownership structure i.e. personally, via a company or an offshore structure. As a Non-Resident Landlord (NRL), rents will be received net of basic rate tax, which is deducted by the tenant or agent (acting for the owner of the property) except where approval has been obtained from HM Revenue & Customs to receive rent gross.
Capital gains tax
Non-UK residents are not subject to CGT on the gains made from the disposal of UK assets including properties situated in the UK. The same principles apply to offshore companies and overseas trusts. There are anti-avoidance regulations under section 10A of the Taxation of Chargeable Gains Act 1992 to prohibit UK residents from moving abroad to avoid UK CGT.
There is currently no statutory definition of residence in the UK, so specific advice is needed on the residence status.
Inheritance Tax
Liability to UK inheritance is determined by a person’s country of domicile and is normally due on all UK properties, no matter where the owner is resident. For UK domiciled individuals (regardless of resident’s status) IHT is levied on their worldwide assets, whilst non-UK domiciled individuals are exposed to IHT on UK assets only, such as a UK property.
The value of the assets above the Nil Rate Band (NRB) which is currently £325,000 is charged to IHT at 40%. There is an exemption for assets passing between spouses/civil partners but this can be limited in certain circumstances. If the donor (or deceased) client is UK domiciled but the recipient spouse is not, then the spouse exemption is limited to just £55,000.
Owning a UK property via an offshore company may help reduce the impact of IHT for individuals who are not UK domiciled. Provided the client does not become UK domiciled (or deemed domiciled) in the UK, their non-UK assets will be outside the scope of IHT.
Owning a UK property directly via an offshore trust can be expensive. There is now an immediate entry IHT charge whenever assets are put into a trust despite the resident status of the trust: the IHT charge would be calculated on the value of the UK situated property going into the trust.
The trustees will have additional IHT charges to pay on every tenth anniversary of the trust’s creation and whenever the UK assets come out of the trust.
Stamp duty
Many foreign residents are not aware of the additional tax due when buying a UK property. Stamp Duty Land Tax applies to all UK property purchases, irrespective of the residence of the purchaser. The rate of SDLT varies from 1% to 5% depending on the value of the property and is payable by the purchaser of the property.
There are some potential ways of reducing the SDLT charge, if the property is above £1 million but these can be viewed as being at the ‘robust’ end of tax planning!
Planning opportunities
If a company owns the UK property that the foreign resident wants to buy, the company shares instead of the actual property may be purchased and SDLT avoided.
Owning via a company can help reduce the exposure to IHT but appropriate planning may be required if there are plans to live in the property, in which case, direct ownership may be better. In addition, offshore companies must ensure their management and control stays outside the UK.
The ownership of a UK property via an offshore company may not be effective long term planning Whether a trust is right for an individual depends on a number of factors, including the tax position and succession plans. Offshore trusts could provide a suitable alternative. This type of structuring can be expensive to set up and run.
Conclusion
For non-residents, owning a UK investment property via an offshore company can help reduce the tax bill on the rental income and may help shelter the value of the property from IHT. There can also be SDLT savings by purchasing shares in a company that owns the property.
Being non-resident should mean the client doesn’t need to worry about CGT, unless they are only temporarily resident outside the UK. Non-resident companies and trusts should also be outside the scope of CGT, even on the sale of a UK situated property.
Where offshore companies own UK properties, there may be an issue on whether the company is trading in the UK property market which could result in UK corporation tax of about 21% of the profits made. HMRC clearance may be required for the CGT regime to apply.
There is no ‘right’ answer to how a non-resident should purchase UK property and much depends on their personal situation and intention. You should always seek advice from a tax specialist when buying a UK property.
Wednesday 21 April 2010
Tuesday 20 April 2010
UK Taxation - Becoming non-UK resident
Recent developments in the UK suggest that it is harder to become non-UK resident for tax purposes. Since UK taxes are normally due on worldwide income and gains made by UK residents, people living outside the UK may find that they have to pay UK taxes on foreign income and gains.
HM Revenue & Customs (HMRC) have won a series of test cases that show the "90 day rule" is not a reliable guide to UK residence. As a result, HMRC has recently updated its guidance to determine whether someone is non-UK resident and is looking far more closely at people who claim non-UK resident status.
One of the benefits of living or working abroad is that it can often mean you pay no UK taxes or at the least, less tax. Therefore, a summary of the current practice is provided below.
To become non-UK resident you need to be able to show that you have left the UK and settled abroad, making a clean break from the UK. When deciding on residence status, HMRC are likely to take into account social, economic and family ties and if your circumstances suggest that your family life is still rooted in the UK, they may take the view that you are still UK residence.
One crumb of comfort comes from working abroad. Provided a person physically leaves the UK to work abroad under a contract of employment for at least one UK tax year, and adheres to the 90-days rule, the non-UK residence status should be applicable under the right circumstances. In accordance with section 830 Income Taxes Act 2007, "living accommodation available in the United Kingdom for the individual's use" should be ignored when considering UK residence.
Despite a foreign employment contract, if a person's lifestyle suggests that he/she is away from the UK on a temporary basis, he/she may continue to be UK resident and the 90 day rule may be irrelevant.
HMRC’s approach to consider a person’s connection to the UK and looking for signs that they have severed all ties with the country when determining non-UK residence may be to stop people avoiding UK taxes by leaving the UK temporarily. But in the absence of a legal definition of “resident” in the UK, we will have to depend on an ever-expanding body of case law and HMRC guidelines to clarify the circumstances when a person can become non-UK resident.
These new guidelines came into effect on 6 April 2009 and are likely to affect individuals who may have moved abroad and still have ties with the UK. If HMRC’s view prevails unchallenged it may be virtually impossible for someone to become non-UK resident without taking the rest of their family with them, regardless of the disruption to other people’s careers or children’s education and social needs. This seems wrong on so many levels it is difficult to know where to begin.
The UK seems to be edging closer to the American system of taxing its passport-holding citizens regardless of where they live in the world. The European Court of Justice might have something to say about that one day. In the meantime, it has become more difficult to let clients know what they need to do to achieve or maintain their non-resident status. “Get out and never come back” just doesn’t sound like the sort of advice they’re looking for.
HM Revenue & Customs (HMRC) have won a series of test cases that show the "90 day rule" is not a reliable guide to UK residence. As a result, HMRC has recently updated its guidance to determine whether someone is non-UK resident and is looking far more closely at people who claim non-UK resident status.
One of the benefits of living or working abroad is that it can often mean you pay no UK taxes or at the least, less tax. Therefore, a summary of the current practice is provided below.
To become non-UK resident you need to be able to show that you have left the UK and settled abroad, making a clean break from the UK. When deciding on residence status, HMRC are likely to take into account social, economic and family ties and if your circumstances suggest that your family life is still rooted in the UK, they may take the view that you are still UK residence.
One crumb of comfort comes from working abroad. Provided a person physically leaves the UK to work abroad under a contract of employment for at least one UK tax year, and adheres to the 90-days rule, the non-UK residence status should be applicable under the right circumstances. In accordance with section 830 Income Taxes Act 2007, "living accommodation available in the United Kingdom for the individual's use" should be ignored when considering UK residence.
Despite a foreign employment contract, if a person's lifestyle suggests that he/she is away from the UK on a temporary basis, he/she may continue to be UK resident and the 90 day rule may be irrelevant.
HMRC’s approach to consider a person’s connection to the UK and looking for signs that they have severed all ties with the country when determining non-UK residence may be to stop people avoiding UK taxes by leaving the UK temporarily. But in the absence of a legal definition of “resident” in the UK, we will have to depend on an ever-expanding body of case law and HMRC guidelines to clarify the circumstances when a person can become non-UK resident.
These new guidelines came into effect on 6 April 2009 and are likely to affect individuals who may have moved abroad and still have ties with the UK. If HMRC’s view prevails unchallenged it may be virtually impossible for someone to become non-UK resident without taking the rest of their family with them, regardless of the disruption to other people’s careers or children’s education and social needs. This seems wrong on so many levels it is difficult to know where to begin.
The UK seems to be edging closer to the American system of taxing its passport-holding citizens regardless of where they live in the world. The European Court of Justice might have something to say about that one day. In the meantime, it has become more difficult to let clients know what they need to do to achieve or maintain their non-resident status. “Get out and never come back” just doesn’t sound like the sort of advice they’re looking for.
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