How should non resident or non domiciled buyers of UK residential property own or hold residential property? Overseas buyers or owners of UK residential property above £1m in value need to consider carefully in what name or legal structure they should buy or hold property for their protection and to avoid paying excess UK taxes.
Here we take a brief look at 3 basic ways of owning UK residential property.
1. Personal or individual ownership.
A property purchased in the names of one or more individuals is usually the simplest and most tax efficient way to hold property, although this will depend upon your individual circumstances. The ATED (Annual Tax on Enveloped Dwellings) and higher rate of SDLT (stamp duty land tax) levied on companies should not apply and full CGT (capital gains tax) relief can be claimed on a disposal if it can be shown that the property is the owner’s principal private residence (PPR).
One disadvantage is liability to UK IHT (Inheritance Tax) charged at 40% on death. However, there are various ways of minimising or avoiding this. For example, if held jointly the property can pass on death to the surviving owner and it may not form part of the estate of the first joint owner to die, which may also avoid the need to obtain a UK grant of probate. Alternatively, IHT can be minimised by securing a loan against the property, or the tax can be covered by taking out term life insurance at relatively low cost. Lifetime transfers to the next generation are another popular way of mitigating IHT.
If you are not resident in the UK and sell or dispose of a UK residential property you may have to pay CGT on any gains you make on disposals after 5 April 2015. Principal Private Residence Relief (PPR) could be available. Under PPR, anybody living in the UK who sold their principal private residence would be exempt from paying CGT. Expats owning UK property could continue holding it until they return to the UK, live in it and then sell claiming exemption from CGT because it was their main home. To qualify for PPR relief, the owner of a UK property must show that they have spent at least 90 days in the property for each year when they are not UK resident. The 90 days can be split between husband and wife. The PPR property can be their main residence in the UK but need not be their main residence in the world. However, under the new rules for PPR some non-residents may be unable to claim PPR in respect of a tax year without becoming UK tax resident for that tax year.
2. Ownership through a trust or nominee.
The CGT charge for non residents on disposals after 6 April 2015 has been extended to non-resident trusts. The CGT charge will be at 28% but trustees will be entitled to an annual exemption at half the rate for individuals. PPR relief will be available to trusts where a beneficiary meets the relevant criteria for residence or the 90-day rule. This will apply to both UK resident and non-resident trusts.
If the property will qualify for PPR relief, it is usually preferable to hold it in the names of individuals or trustees rather than in a company name. This way, on acquisition, SDLT will be at standard residential rates and ATED will not apply. However, the property will fall within the IHT net unless this can be mitigated in another way.
Trustees will generally be subject to a ten yearly charge which could be as much as 6% of the capital value of the property. This charge is only calculated on the equity in the property. So trustees could choose to take out loans to purchase in order to reduce the equity in the property.
Property owners can now consider transferring property to a QNUPS (Qualifying Non UK Pension Scheme). A QNUPS is a multi-member pension scheme which should fall outside the general charge to CGT, ATED and IHT so it is tax efficient and likely to be particularly useful where property is rented out or PPR will not apply.
For an individual wishing to maintain confidentiality with respect to the beneficial ownership of residential property it is possible for a property to be purchased through a nominee company. The main advantages of this approach are:
- The name of the company will appear as the legal owner at the Land Registry so there will be no public record of the beneficial ownership of the property;
- The 15% Stamp Duty Land Tax rate and the ATED charges should not apply to the company because it is purchasing the property in a nominee capacity.
- IHT should not apply on the value of the property.
3. Ownership through a company or non natural person
A corporate structure may still be beneficial for some overseas owners since it provides protection from UK Inheritance Tax (IHT) which is at a rate of 40%. For new purchases, the use of a company is now less likely to be a good option, but it will depend on the priorities of the investor. The usual main advantages are:
- Confidentiality of the ultimate beneficial owner (UBO)
- Asset protection and succession planning (including when combined with a trust)
- No UK Inheritance tax
From 1 April 2016 the ATED applies to UK residential properties owned by Companies or NNPs above £500,000 in value. The annual tax is based on a scale. As an example, taking a property valued at between £2m and £5m, the annual charge would amount to £15,400. There are some reliefs available including for property development, rental and trading businesses.
Since 1 April 2015, CGT applies to future increases in value on a sale or gift of residential property held by foreign investors or UK expats including offshore companies. The current CGT rate is 28%, although basic rate taxpayers pay only 18% of the profits. CGT applies to increases in value from 1 April 2015 and affects foreign investors and UK expats selling properties while based overseas.
SDLT (Stamp Duty Land Tax) at a rate of 15% for purchase of UK Property over £2m in value by a company is payable within 30 days of completion by the buyer.