Foreigners and UK property ownership – exposure to UK taxes

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.