Over the last few years the government has made a number of changes to the way UK residential property is taxed. These changes have generally imposed greater taxation on the acquisition, holding and disposal of residential property situated in the UK and we set out below some key points to consider.
Annual Tax on Enveloped Dwellings (ATED)
- ATED is an annual charge that may be imposed on non-natural persons (including companies) that own UK residential properties valued in excess of £500k per individual dwelling. The ATED charges range from £3,500 to £220,350 depending on the value of the individual property, although there are a number of reliefs that can mitigate the charge. Always remember that a relief must be claimed in an ATED return each year. For further details please read our article 'Annual Tax on Enveloped Dwellings'.
Stamp Duty Land Tax (SDLT)
- 15% rate for enveloped residential property: a non-natural person (including a company) that purchases a UK residential property for more than £500k may have to pay SDLT at a rate of 15% unless a relief applies. The rules are designed to cover the acquisition of properties that will fall within ATED and there are a number of similarities between the two regimes. For further details please read our article 'SDLT: 15% rate on enveloping high-value residential properties'.
- 3% additional rate for residential properties: from 1 April 2016 the acquisition of residential property in the UK may attract an additional 3% rate of SDLT. The higher rates apply to purchases by individuals if they already own another residential property (wherever situated) unless the new property will be used as a main residence and replaces one that has been used as a main residence previously in the last 3 years.
- The additional rate applies to all purchases of UK residential property by a company and can apply to acquisitions by trustees too. For further details please read our article '3% Additional Rate of SDLT: an update'.
Capital Gains Tax (CGT)
- Tax rates: from 6 April 2016 the standard CGT rates were reduced to 10% for basic rate tax payers and 20% for higher rate tax payers. However, the old rates of 18% and 28% continue apply to disposals of residential property.
- ATED CGT: non-natural persons (whether UK resident or not) holding residential property within the ATED regime are subject to UK CGT on gains arising on the disposal of high-value residential properties situated in the UK. Unless an election is made to use the value of the property as at 31 March 1982 or, if later, the date of acquisition, ATED CGT is only payable on gains arising after 5 April 2013. The total gain is discounted by the number of days (as a percentage of total days) that the property is not within the ATED regime.
- CGT for non-residents: non-UK resident individuals are subject to UK CGT on the disposal of UK residential property on or after 6 April 2015. Normally, the new rules only tax gains arising after 5 April 2015, however it is possible to elect to apportion the entire gain arising over the full period of ownership with only the amount apportioned to the post-5 April 2015 period being subject to UK CGT.
Inheritance Tax (IHT)
- IHT new main residence allowance: an additional IHT main residence allowance is to be introduced from April 2017. The new allowance will be added to the current nil-rate band and will be phased in over four years (£100k in 2017/18 rising to £175k in 2020/21). As with the nil-rate band any unused allowance can be transferred to a surviving spouse for use on their death. This means that for married couples the maximum potential nil rate band in 2020/21 will be £1,000,000. There are a number of restrictions on the relief. For example, it only applies to transfers to children and grandchildren and is only available on death. Therefore it does not benefit those without children nor does it mitigate lifetime gifts. For further details please read our article 'The residence nil rate band'.
- If the proposed changes are implemented, residential properties held in offshore companies and partnerships: from 6 April 2017 offshore companies and partnerships holding UK residential property will no longer be treated as “excluded property” for IHT purposes. Borrowing will be taken into account when valuing the assets although connected party loans will not. Further details will be made available when the legislation has been passed.
Income Tax/Corporation Tax
- Interest relief for buy-to-let investors: the tax relief on interest paid by individual buy-to-let investors will, from the tax year 2017/18, be gradually reduced over a four year period until the maximum relief is given at the basic income tax rate of 20%. This will particularly impact higher rate tax payers who would be well advised to review their funding strategy and consider alternative structures in which to hold and acquire residential property.
- Non-residents trading in land/developing UK land: new rules, introduced from 5 July 2016, seek to subject offshore developers and traders in UK land to UK taxation. These rules are designed to disapply the benefits of double taxation agreements and are drawn widely to include the sale of companies holding UK land in certain circumstances.