An extract from The Real Estate Investment Structure Taxation Review, 3rd Edition
Overviewi Investment vehicles in UK real estate
Investors have considerable flexibility when selecting a vehicle to invest in UK real estate. There are no restrictions on foreign ownership, and commercial real estate generally remains an attractive asset class.
Many different vehicles, both foreign and domestic, are used. Often, the choice is driven by the investor's tax status.
More common vehicles include:
- offshore companies;
- regulated structures, such as real estate investment trusts (REITS); and
- tax transparent entities such as unit trusts.
A company holding real estate is subject to corporation tax on its UK property income and gains from direct disposals of UK land regardless of where the company is registered or tax resident. Gains from disposing of indirect interests in land (such as shares in a property-rich company) can also be taxable.
The rules differ depending on whether the property owner is an investor or trader in the property, with the broad distinction being whether the property is being held to generate a rental yield or is being acquired to be developed and sold. It is important to get this distinction right from the outset. The rest of this chapter focuses on a person holding property as an investment.
Broadly, rents are taxed as property business profits, while gains from a direct or indirect disposal are subject to corporation tax on chargeable gains.Income tax and capital gains tax
Rents from property are subject to income tax in the hands of non-corporate investors (such as an individual or the trustee of a trust). A non-resident is taxed on property income in the same way as a resident taxpayer.
Gains made by non-corporate investors are subject to capital gains tax (CGT), potentially at rates of up to 28 per cent for residential property.Withholding taxes
The UK has several withholding tax regimes that are relevant to real estate, namely on interest, on rental payments to non-residents and to certain persons undertaking construction work.Annual tax on enveloped dwellings
Annual tax on enveloped dwellings (ATED) is an annual tax payable primarily by companies that own residential property valued at more than £500,000. Its purpose is to dissuade companies from reducing the residential housing stock. It is imposed at a fixed amount depending on the property's value. There are some limited exemptions available.Value added tax
Value added tax (VAT) at 20 per cent currently applies to most goods and services supplied in the UK if the supplier is VAT registered unless the supply is exempt. Real estate is generally exempt unless opted into the regime.Property transfer taxes
UK property transfer taxes are charged on the acquisition of UK property. The applicable tax depends on whether the land is in England, Northern Ireland, Scotland or Wales.Stamp duty and stamp duty reserve tax
Stamp duty is charged on documents effecting a transfer of stock or marketable securities (e.g., shares and certain debt securities). In practice, the tax is mostly charged on transfers of unlisted UK shares.
Stamp duty reserve tax (SDRT) is a similar tax, albeit it is generally charged on unconditional agreements to acquire shares. However, it is rarely paid on an acquisition of unlisted shares as the SDRT liability is cancelled if stamp duty is paid instead.Business rates and council tax
UK property users must also pay certain local area and governmental taxes, and the taxes differ depending on whether the property is commercial or residential.