The UK tax rules applying to property-holding vehicles have changed dramatically in the last 10 years. As a result of one change after another, regular reviews of pre-existing structures have been needed. The following is an overview of the main changes.
The annual tax on enveloped dwellings (ATED)
This tax was first introduced in 2013 for companies holding residential property worth more than £2 million, but the threshold was gradually reduced to £500,000. The tax is a flat charge, if no relief applies, and it is charged according to a banding system. At the top end, for properties worth more than £10 million but less than £20 million, the annual charge in tax year 2023/24 is £134,550, whilst for properties worth more than £20 million, the annual charge is £269,450.
Given the differences between the bands, it is important to take care over valuations. This will mean engaging a professional valuer, and ensuring that the property is revalued at the required intervals. Disputes with HMRC and the district valuer over valuations can be protracted, although this has not been a significant issue with ATED in more recent years. In the early years, following its introduction, there was a lack of awareness of ATED amongst affected taxpayers. This led to some having to disclose unpaid taxes.
Capital gains tax (CGT)
The general UK tax treatment for non-resident owners of UK land and property used to be highly favourable, in that non-residents were outside CGT altogether (in line with the general rule). Changes were made in 2015 and 2019, however, and it is now the case that a direct or indirect disposal of any UK land and property will be subject to non-resident capital gains tax (for individuals and trustees) or corporation tax (for companies). These taxes are going to be felt more and more as we move further away from April 2015 and April 2019, when acquisition values of properties acquired before those dates were ‘rebased’ under transitional rules.
Inheritance tax (IHT)
Further significant changes were made in April 2017 to bring non-UK assets - that would otherwise be outside IHT as the excluded property of an individual or a trust - into the IHT net, if the value is attributable to UK residential property. This rule change has been a real ‘game changer’ in terms of how new purchases of residential property are structured.
The UK tax regime now means that personal ownership is much more attractive, when compared to other options such as corporate ownership, certainly with residential property. In many cases, particularly with owner-occupied homes, we will see more simple ownership arrangements in the future, which should reduce the scope for tax issues to arise.
However, there can be a lack of awareness that UK real estate is within the scope of UK inheritance tax regardless of where the owner is resident and domiciled. This lack of awareness can lead to missed opportunities and also unexpected liabilities.
Thinking specifically about non-resident trusts owning properties through non-UK companies, in many cases there are now IHT charges on two fronts: charges on every ten-year anniversary of the trust’s creation and potential inheritance tax on the death of the settlor if he/she is a beneficiary (or not excluded). As with the CGT changes described above, the full effect of these rules may not yet have been felt because no ten-year anniversary date has arisen or the death has not occurred. There remains potential for filing obligations to be missed, because the rules are so complex, and for more disputes over valuations etc in the coming years.
It has been important over the last ten years for advisors, and those administering property-holding structures, to keep pace with the changes to the UK tax rules. Issues may remain in cases where updated advice has not been sought from specialist advisors.
Changes in circumstances
A common pitfall with property-owning structures is that the original advice that led to the establishment of the structure has not been refreshed to take account of new circumstances. Examples would include: family members become UK tax resident; family members take up occupation of a property that was previously rented out; or, other assets are added to a property holding structure. Changes of this nature should prompt a tax review to avoid issues down the line.
This is an extension of the point above. An example would be that the original rationale for the structure is forgotten, as are the roles and responsibilities of those administering it or benefitting from it. In the case of corporate structures, for example, disputes can arise over where a company is resident for tax purposes, based on where decisions are taken and by whom they are taken.
Compliance and deadlines being missed
As a result of the changes referred to above, many more overseas individuals, trustees and companies have UK tax compliance obligations than before, whether that is an obligation to report a trust’s IHT ten-year anniversary charge, a death, or a disposal of the property. The need to report a non-resident CGT disposal caught many out in the early days of the new rules. The deadline to file a return on the disposal of a UK residential property is now 60 days from the date of disposal (whether the individual is UK resident or non-resident).
The taxation of UK land and property can be complex. HMRC is focused on potential non-compliance, particularly in relation to offshore matters, and the values at stake can be significant. HMRC has sent ‘nudge letters’ to non-resident corporate owners of UK residential property that may have failed to meet reporting obligations. In 2022, HMRC launched a ‘Let Property Campaign’ to give residential landlords the means to declare unpaid taxes on more favourable terms than would be available if HMRC enquired into the relevant taxpayer’s affairs.
The recently-introduced register of overseas entities now provides HMRC with what they have called ‘unparalleled insight into the true beneficial ownership of UK property which can be very valuable for assessing tax risks’. These tax risks are likely to remain an area of focus in the years to come.