Residential property in the UK has been under an unprecedented and concerted attack for the best part of the last decade. The attack was launched following the Government’s conclusions in 2012 that, by using corporate structures, non-domiciled individuals could pass beneficial ownership of UK residential property down through generations without any inheritance tax ever arising. The Government was also concerned about stamp duty land tax (SDLT) avoidance since, rather than selling the underlying UK property asset, families could sell the shares in a property-holding company to a buyer thereby avoiding an SDLT charge in the buyer’s hands.

The concern manifested itself in changes to capital gains tax, inheritance tax, stamp duty land tax, income tax and corporation tax. In short, there were comprehensive changes to almost all applicable UK taxes. We saw the introduction of an entirely new tax – the Annual Tax on Enveloped Dwellings (ATED) – and there was even the introduction and subsequent abolition of yet another tax – ATED-related capital gains tax.

In a United Kingdom still grappling with an acrimonious exit from the European Union, and fighting the worst societal and economic crisis in a generation, the would-be purchaser of UK residential property is beset with confusion and complexity as a result of the numerous changes to the applicable taxes in recent years. Yet UK property remains an attractive proposition for the foreign investor for a variety of reasons.

In this article we reflect on the chaos of the ever-evolving rules and summarise the changes that have been introduced to the taxation of the purchase, ownership and disposal of UK residential property. While many of the traditional property-holding structures are no longer as effective as they once were from a UK tax point of view, we offer some thoughts on the options that are still available and that provide both tax and other benefits.

Purchases of UK residential property

Stamp duty land tax (SDLT)

SDLT is a tax on the consideration given – usually the purchase price – on the transfer of an interest in UK land.

From 21 March 2012, SDLT was increased to 15% where a residential property worth more than £2 million was acquired by a ‘non-natural person’ (most commonly a company or similar structure). Reliefs from this higher rate are available in certain circumstances such as where a property is to be rented for at least the following three years.

The 15% rate was subsequently extended to catch residential properties worth in excess of £500,000.

In April 2016, the Government introduced an SDLT surcharge upon the acquisition of ‘second homes’. The regime is complex and broad in scope with overseas properties being taken into account for the purposes of assessing whether a ‘second home’ is being acquired. The changes result in an increase of 3% in the rate of SDLT that would otherwise have been payable.

The Government is now also set to introduce an SDLT surcharge of 2% for non-UK residents acquiring interests in residential property from 1 April 2021. For these purposes, non-residents include individuals, companies, partnerships and trustees.

The only shred of positive news is that, in response to the Covid-19 pandemic, however, the Government has recently introduced an SDLT ‘holiday’ which is set to last until 31 March 2021. This ‘holiday’ raises the SDLT ‘nil rate’ – the part of the consideration upon which no SDLT is payable – from £125,000 to £500,000.

Ownership of UK residential property

The Annual Tax on Enveloped Dwellings (ATED)

ATED was introduced with effect from 1 April 2013 with the aim of encouraging families to ‘de-envelope’ their UK residential properties That is, to remove their UK properties from corporate ‘envelopes’ and to hold them in personal names. ATED was effectively the advent of the UK’s mansion tax, albeit one in watered-down form.

The charge initially affected residential properties owned by non-natural persons (ie companies) and valued in excess of £2 million. However, the Government subsequently extended the scope of the charge and it now affects properties worth in excess of £500,000. Reliefs from the charge are available in certain circumstances – typically where the property is being rented to third parties on an arm’s length basis or where the property is being redeveloped.

The charge is a flat rate of tax according to the value ‘band’ into which the property falls. Consequently, as an example, the owner of a property worth £5.1 million pays the same annual tax as the owner of a property worth £9.9 million.

The ATED charge did indeed prompt many families to ‘de-envelope’ their UK properties but, evidently, not as many as the Government had hoped. In response, the Government increased the applicable rates by 50% so, that from, April 2015, the annual charge for a property worth £2.1 million was raised to £23,350. That amount of tax on an annual basis was significant even for a wealthy individual or family and particularly for those who only used their properties for limited periods each year. With the UK property market having performed well over previous years, many people with relatively modest properties also suddenly found themselves caught by the ATED charge where they held their properties through structures that had existed for decades.

The ATED charge is linked to the Consumer Prices Index (CPI) and therefore increases year after year in line with inflation.

Income tax

Prior to 6 April 2017, private individual landlords were able to deduct the costs of any mortgage interest payments from their gross rental income for tax purposes. However, this gave rise to a perceived inconsistency since buy-to-let landlords could deduct mortgage interest payments whereas homeowners could not. Political pressure resulted in the Government introducing new rules by which a private individual would have their right to deduct mortgage interest payments from gross rental income withdrawn. The restrictions were brought in gradually; for the tax year 2017/18 a private individual could deduct 75% of their mortgage interest costs but from the start of the current tax year, private individuals can no longer deduct any mortgage interest payments from gross rental income. Instead, to soften the blow slightly, they qualify for a new tax credit.

The restrictions outlined above do not apply to corporate landlords. From an income tax perspective, holding rental properties through companies can remain advantageous for the following reasons:

  • A corporate landlord can deduct all its mortgage interest payments whereas a private individual landlord cannot.
  • A corporate landlord currently pays corporation tax at the rate of 19% on rental receipts whereas an individual pays income tax at their marginal rate (up to a maximum of 45%).

If rental property is held directly through a trust, trustees pay income tax at the ‘rate applicable to trusts’ (the RAT) which is currently a flat rate of 45%.

A would-be purchaser of UK residential property to be rented needs to bear in mind the higher SDLT charges if the property is to be purchased through a company. On the other hand, paying income tax at lower rates and the ability to deduct mortgage interest payments makes company ownership attractive. In each case, there will be a point at which the income tax advantages outweigh the SDLT disadvantages.

Purchasers should also consider the duration for which they are likely to own a rental property. If the purchaser intends to hold the property for a short period, or perhaps to sell the property after securing a capital gain, any income tax benefits are likely to be minimal. Conversely, if a rental property is likely to be held for a significant period, those income tax savings will be enjoyed for a longer period.

Inheritance tax (IHT)

Prior to 6 April 2017, shares in a foreign company were not UK situs assets for UK IHT purposes. Where those shares were owned by a non-UK domiciliary, there was no liability to UK IHT either on a gift or on death as non-domiciliaries are not subject to UK IHT on non-UK assets. Similar advantages were enjoyed where foreign company shares were held through a trust established by a non-UK domiciliary.

As a result, the Government introduced IHT rules that would ‘look through’ the corporate structure. As a result of the changes, upon the death of the shareholder of a foreign company that owns UK residential property, or when the shareholder makes a gift of those shares, there is a UK IHT event and IHT may arise. In effect, the company shares become UK assets for UK IHT purposes.

The rules only affect ‘close companies’ and not diversely-held companies. However, the applicable de minimis thresholds are modest. An individual might only hold 5% of the shares in a foreign close company owning UK residential property but this is enough for the rules to be engaged.

The changes also affect non-resident trustees holding shares in a foreign company that owns UK residential property. From 6 April 2017 the shares in such a company are treated as ‘relevant property’ for UK IHT purposes which brings the trust within the scope of the UK IHT relevant property regime. IHT charges are payable on ten-year anniversaries of the trust’s inception and on distributions. There are further adverse tax consequences if the settlor of a trust has retained a benefit (ie is included in the class of trust beneficiaries).

The new rules can unwittingly catch trusts that have never previously had a UK tax nexus – for instance, where the settlor, the beneficiaries and the trustees have not, and have never been, resident or domiciled in the UK. Offshore trustees need to analyse their trusts carefully and check whether there are any UK residential property interests anywhere in their structures.

There are other potential traps. The rules apply to any property that is capable of being used as a dwelling. For instance, properties in Mayfair that are being used as offices but that are capable of being used as a residential dwelling might well be caught. Similarly, a property developer who has completed a residential development, but has not yet sold it, might be holding multiple residential property interests.

Even investors in UK commercial property need to be cautious since some commercial properties sometimes contain residential property elements (eg a penthouse on the top floor).

The reliefs applicable to the ATED regime are not applicable here.

Loans made to acquire, maintain or enhance UK residential property and security for loans

The lesser-known aspect of the new IHT rules is that loans made to fund the acquisition, enhancement or maintenance of UK residential property are now UK IHT assets in the hands of the lender. Similarly, collateral given as security for such a loan is also now an IHT asset. While borrowing from a bank will not be caught by the new rules in most cases, the rules do affect private arrangements where, for instance, an individual, trustee or close company lends to another individual for these purposes. For instance, if a mother were to make a loan to her son so that he could buy a home in the UK, or build an extension, the debt held by the mother would now be a UK IHT asset and therefore potentially subject to IHT on the mother’s death. Equally if the mother’s offshore investment portfolio was used as collateral for a bank loan made to her son, that investment portfolio would also now be a UK IHT asset.

These new rules are particularly concerning for trustees who ought to be auditing their structures and checking whether any loans have been made, or collateral provided, by them as trustees, or by any of the companies in their fiduciary structures, that might be caught by these rules.

UK register of residential property

The Registration of Overseas Entity Bill is set to come into force some time in 2021. Under the proposed Bill, any ‘Overseas Entity’ (being a company, partnership or other legal entity that is registered in a territory outside the United Kingdom), which owns UK land, or is acquiring UK land, will have to provide comprehensive information, that must be updated on an annual basis, about its underlying beneficial owners to Companies House, where it will be stored on a publicly available register. Any Overseas Entity required to provide information that fails to do so could be barred from making dispositions of that land, and may face criminal liability punishable by fines and, in certain cases, imprisonment.

The new register should ensure that the Treasury collects IHT when it is due and that families do not escape IHT liabilities either through innocent ignorance of the rules or, in a minority of cases, deliberate avoidance.

Disposals of UK residential property

Historically, disposals of UK residential property by non-residents – be it individuals, companies or trusts – were outside the scope of the UK capital gains tax ‘net’. From April 2013, however, ATED-related capital gains tax (ATED-CGT) was introduced for disposals made by entities subject to the ATED regime. Again, reliefs were available if, for instance, the property was let on an arm’s length basis.

In April 2015, the UK’s capital gains tax regime was extended to include all non-residents holding UK residential property, not just companies, with the introduction of non-resident CGT. In a scenario where a company was within the scope of both ATED-CGT and non-resident CGT, ATED-CGT applied in priority. In scenarios where ATED-CGT relief was available, a company would still be subject to non-resident CGT.

The ATED-CGT regime was also extended to cover disposals of properties worth in excess of £500,000.

In April 2019, the Government announced that gains on disposals of UK residential property - and, indeed, commercial property - would be subject to corporation tax rather than capital gains tax. The distinction – that corporation tax is a tax on profits whereas CGT is a tax on gains – is more important from a technical perspective than a practical one. These changes abolished ATED-CGT and meant that non-resident CGT would remain in force for non-corporate non-residents (ie individuals and trustees including corporate trustees) only.

At the same time, the Government also introduced a regime to tax disposals of interests in so-called ‘property rich’ entities. These are entities that derive more than 75% of their value from UK land – that is, any UK land and not just residential property – and where the person disposing of the interest (or persons connected to him) owns a 25% interest in that entity. Such a disposal will now trigger a CGT event in the UK. [1]

What are the options?

Structuring the holding of UK residential property has become increasingly challenging in recent years and there are simply no more ‘magic’ solutions. However, options do still exist and a bespoke approach is required in order to determine the most suitable ownership structure in any given case. The most appropriate option in any given circumstance will depend on an array of factors including the domicile and residence status of the purchaser, the intended use/occupation of the property, the value of the property, whether the property is to be purchased on a cash basis or with the aid of a mortgage and for how long the property is likely to be held.

UK will

In most cases, there is an exemption from UK IHT where an individual dies and leaves UK real estate to a surviving spouse or civil partner. Holding a property under a joint tenancy or preparing a UK will is often an effective way of deferring any IHT charges until the second death in a marriage or civil partnership.

Lifetime giving

In certain circumstances, it can be appropriate to pass UK real estate (or the relevant company shares) on to later generations with the intention, again, of mitigating the likelihood of any IHT charges arising on the death of the current owners. Such a gift would be a disposal for UK CGT purposes at deemed market value and a potentially exempt transfer for UK IHT purposes. There could also be an SDLT charge if the recipient gives consideration for the transfer. Typically, this is the case if the recipient of the property takes over the mortgage. In many cases no IHT, CGT or SDLT would actually be payable but careful analysis is required and suitable valuations would be needed prior to making any gifts. Care is needed if the donor – the person making the gift – intends to continue using the property in any way – typically by occupying it or by receiving rental income.


As a general rule, IHT is chargeable on a death on the net value of assets. It follows, therefore, that a mortgage taken out to acquire UK residential property and secured against that property is deductible from the gross value of the asset upon death for IHT purposes. This planning allows families to own properties in the UK but, by limiting the amount of their equity in those properties, they can reduce the IHT exposure. There are, however, a couple of important points to note:

  • Where the borrowing is not from a third party such as a bank, that borrowing might be disqualified for the purposes of any IHT calculations. At the same time, by virtue of the April 2017 changes, the loan receivable would now be a chargeable asset for IHT purposes. The likely ‘best case’ in such a scenario is that the taxpayers will simply have shifted the IHT liability from the borrower to the lender. The likely ‘worst case’ in such a scenario is that an IHT liability will have been created in the hands of the lender without removing the IHT liability for the borrower.
  • If, on the other hand, a loan is made by a bank but the borrower gives collateral for that loan, the IHT might again not be reduced. Again, the liability is simply shifted as the collateral is now an asset for IHT purposes.

Life insurance

Life insurance policies – on a term or whole of life basis – can be a simple and effective way to give families comfort and certainty by ensuring that there is a ‘pot’ of funds available to settle any IHT liabilities that may arise in future.


Trusts and other fiduciary arrangements still offer all their characteristic benefits in terms of asset protection and flexible succession planning. They therefore remain an attractive solution for an array of non-tax reasons and should not be discounted. Trusts are subject to a different UK IHT regime but this can result in lower IHT charges than if the properties are held personally or through a company. Trusts also provide more certainty on the tax position since, generally, the IHT charges are regular and expected (rather than the IHT charges that arise on a sudden death).

Nominee ownership

Many clients are concerned about privacy, particularly where they live in, or are connected to, countries with high levels of crime or corruption. Corporate envelopes have always provided a way for families to preserve privacy. Although those corporate envelopes seldom provide tax advantages these days, a quirk of English law allows a company or, indeed, any other person to hold a property’s legal title (and be registered at the Land Registry) while the beneficial owner’s identity is kept private. This type of planning offers no tax advantages and may cease to be of value when the register of beneficial ownership of UK property is introduced next year.


Some clients are in the fortuitous position of being able to seek lending from a non-resident trust (or an underlying company) of which they are a beneficiary, most likely on an interest-free basis. The value of the debt would be an asset for UK IHT purposes and the trustees would therefore be subject to IHT charges on ten-year anniversaries of a trust’s inception and on distributions.

In a case where the property is expected to be held beyond the lifetime of the settlor, this can be an attractive option. The aim would be to ensure that the loan is deductible in the borrower’s estate and that the debt (which is now an IHT asset) is subject to periodic, 10-yearly charges at 6% (rather than the full 40% rate that would arise if the debt were held by an individual.

The beneficiary would be treated as receiving a benefit from the trust or company to the value of the interest forgone and, if the borrower is UK-resident, they may well be subject to income tax on the value of that forgone interest. In many cases, however, clients have found this to be a fair price to pay in order to access the other advantages that this arrangement offers.


The UK’s position in a central time zone, its robust legal system and the fact that the property market has provided investment returns for international individuals and families for generations make it an attractive proposition from a real estate perspective. Indeed, Covid-19 apart, London remains a world-leading financial and business centre with first class restaurants, theatres, art, history and entertainment.

While the attractions of London and the UK remain, the days of a ‘one-size fits all’ approach to structuring are long gone. Placing a property in a non-UK company and holding the shares directly or through a trust is planning that no longer makes sense from a UK tax perspective. But several options do remain and, with the right advice, property in the UK can be a profitable investment as well as an asset for families to enjoy while in the UK. The importance of taking tailored, professional advice has never been greater.