Taxation of residential property has been a focus for the UK Government in recent years. Resulting changes have added complexity to the tax system, whilst at the same time the buoyant UK property market has attracted increasing numbers of overseas buyers.
If you are seriously contemplating a UK property purchase, we recommend that you take tailored UK tax advice at the first available opportunity. The information in this note is a broad guide to the taxes to consider, but is no substitute for full advice.
Stamp Duty Land Tax (SDLT)
SDLT is payable on a purchase of a UK property. The applicable rate will depend on the value and nature of the property, with different rates being applied to various ‘bands’ of the value (see table for details).
There is an SDLT ‘surcharge’ if an individual purchaser (or their spouse) of UK residential property already owns residential property (anywhere in the world), and will continue to do so following the purchase. The surcharge imposes an additional 3% SDLT, bringing the applicable rates to between 3% and 15%. There are reliefs available, and circumstances in which the additional 3% may be reclaimed.
There is a punitive rate of 15% (on the whole purchase price), on purchases made by ‘non-natural persons’ such as companies. This broadly covers purchasers who fall within ATED (see below). There are exemptions from this rate, e.g. for qualifying rental businesses. The government is also consulting on an extra SDLT charge on overseas buyers.
Inheritance Tax (IHT)
For those not domiciled in the UK, IHT is payable on death, and on gifts into trust, on UK assets. UK residential properties held via offshore companies have been deemed ‘UK situs’ for tax purposes since April 2017, and are subject to IHT on a shareholder’s death.
IHT is charged at 40% above the Nil Rate Band of £325,000 (charged at 0%), although various reliefs are available. Many clients consider mitigating IHT by giving properties to their (minor) children. Whilst this may seem appealing, it can have severe tax disadvantages in some cases. This is an area where early advice is beneficial as it is difficult to unwind such a gift once made.
Non-Resident Capital Gains Tax (NRCGT)
Since April 2015, NRCGT has been payable on gains realised by non-residents on a disposal of UK residential property. The rate of NRCGT is 28% (although in some cases an 18% rate will apply). NRCGT is payable on the increase in value of property, i.e. the difference between the purchase price and the value at date of disposal (less any deductions or reliefs). NRCGT returns must be filed and tax paid within 30 days of a disposal.
NRCGT arises on all ‘disposals’ of residential property (by individuals; the position of companies is slightly different and beyond the scope of this note), for example gifts to family members. Gifts can have wide-ranging UK tax consequences (with NRCGT just one tax to consider), and it is important that tax advice is taken before any gift is made.
Although not the focus of this note, it is worth mentioning that NRCGT was extended to all UK property, e.g. commercial property, owned by non-UK residents from 1 April 2019.
Annual Tax on Enveloped Dwellings (ATED)
ATED is an annual tax on properties worth over £500,000 and owned by ‘non-natural persons’, such as companies. ATED charges range between £3,650 and £232,350 per year depending on the property value; the charge increases annually in line with inflation.
An ATED return must be submitted each year. There are reliefs available in specific situations, but these must be claimed in an ATED return annually.
If you are buying UK residential property to let to tenants, income tax is payable on the rental income. Rates range between 0% and 45%, depending on the amount of income. Following the end of the UK tax year (5 April), non-resident landlords must submit a UK tax return to declare rental income, and pay any income tax (by the following 31 January).
In the absence of a Will, succession to UK property is governed by UK intestacy law. The intestacy rules may not be in line with your wishes, and may produce a negative tax outcome. We strongly recommend making an English Will when purchasing a property in England, to give certainty on the succession and tax position on death.
|Up to £125,000||0%||3%|
|£125,001 - £250,000||3%||5%|
|£250,001 - £925,000||5%||8%|
|£925,001 - £1.5m||10%||13%|