Investment into UK real estate by non-UK tax residents is becoming increasingly common. There are a variety of holding structures for such investment, each of which has its own UK tax consequences. Options include corporate structures and unit trusts, as well as a range of UK based vehicles which can be appropriate for fund structures which are intended to be widely held. Of course, UK tax isn’t the only determinative factor when considering the optimum investment vehicle, but it is important to understand the tax implications for acquisition, holding and disposing of a UK property before an acquisition is made.
This quick tax guide aims to give a high level overview of the key UK tax considerations which should be taken into account when considering an investment into UK real estate.
Investment in UK property can be made either directly or indirectly through a property holding vehicle such as a company, partnership or trust. For the purposes of this quick tax guide, we have assumed that the property is being held as an investment. If instead, the activities amount to a trade, for example, acquiring a property to redevelop and sell, the UK tax issues will be different.
It is also assumed that the property will not be residential property which is available for occupation by the owner, or anyone connected with the owner, of the property holding vehicle. There is a special tax regime in the UK which applies where a residential property is owned by a non-natural person (such as a company or trust) and can be occupied by persons connected with the owner. In these circumstances there is a Stamp Duty Land Tax of up to 15% on acquisition of the property, and an “Annual Tax on Enveloped Dwellings” (ATED) which is an annual charge on the owner, as well as capital gains tax on disposal of the property. Where residential property is purchased for occupation by the owner, these charges will arise unless the property is owned directly by the individual. Property ownership by non-UK domiciled individuals has inheritance tax issues and specialist advice will be required.
The rest of this guide summarises the tax consequences for different types of holding vehicle (some of which can be used for private acquisitions of property and some of which are fund vehicles), as well as the taxation of the investors themselves.
UK companies are subject to UK corporation tax (currently 21% but reducing to 20% from 1 April 2015) on the net profits arising from any rental income they receive and on any gains realised on the disposal of their assets, including UK properties. These tax charges (in particular the tax on gains) mean that UK companies are rarely the vehicle of choice for holding UK property.
There is no UK withholding tax on dividends. There is UK withholding tax on interest at the rate of 20%, although the UK has an extensive double tax treaty network which may reduce this to 0%. The taxation of non-UK resident shareholders will be governed by the legislation of the jurisdiction in which they are resident.
UK stamp duty, or stamp duty reserve tax, is payable at the rate of 0.5% on the sale of shares in a UK company.
Typically a non-UK company used to hold UK property is located in a low tax jurisdiction, such as the Channel Islands, Cayman or the BVI. There is usually no tax charged in the jurisdiction of incorporation. When a non-UK company is used, it is very important that the board is not UK-based, that the company is run by the board, and that board decisions are taken outside the UK so that the company does not become UK tax resident.
UK rental income received by a non-UK company (after deduction of allowable expenses including interest on loans to the non-UK company for the purpose of acquiring the properties) is subject to UK income tax at the basic rate (currently 20%). There is an obligation on the person paying the rental income to a non-UK resident landlord to withhold tax at the basic rate from such payments, unless the non-UK company is registered with HM Revenue & Customs (HMRC) as a non-resident landlord. This is usually a straightforward application, the effect of which is that payments can be made without any withholding, and the company remains liable to account for the UK tax on the net rental income.
Currently, non-UK resident companies are exempt from paying UK capital gains tax on any gains made on disposal of property (except in certain cases where the property is a residential dwelling worth over £500,000 and is available for occupation by the owner or a connected person).
With effect from 6 April 2015, this position is expected to change for residential property owned by companies the shares in which are not “widely held”. There are no plans to charge UK capital gains tax on disposals of commercial property by non-UK companies.
It is common for internal gearing to be introduced, by having a non-UK holding company which owns 100% of the shares in another non-UK company which owns the property. The holding company would typically raise equity which is passed on to the property holding company by means of a mixture of debt and equity. Provided that the debt is on arm’s length terms and the property holding company is not thinly capitalised, the interest payments on the debt should be deductible in computing the liability to tax on the rent. Care is required to avoid the possibility of UK withholding tax on the interest payments.
The tax treatment of any non-UK resident shareholders will be governed by the legislation of the jurisdiction in which they are resident. If the property holding company is established in a tax haven, it is unlikely that there would be any withholding taxes.
It is generally possible to sell the shares in a non-UK company without incurring a liability to pay UK stamp duty or stamp duty reserve tax.
Limited partnerships are look-through for UK tax purposes, which means that there is no UK tax at the partnership level on any income or gains. English, Jersey and Guernsey law governed partnerships are commonly used. A limited partnership will have one general partner and a number of limited partners. If a UK resident general partner is used, it will be subject to UK corporation tax on its share of the partnership profits, although such profit share is usually nominal.
Non-UK corporate limited partners will be subject to UK income tax at the basic rate (currently 20%) on their share of the partnership’s net income of the partnership. Non-UK individual limited partners will be subject to UK income tax at the appropriate rates of income tax (currently 0%, 20%, 40% and 45%, the rate depending on the overall level of UK income in any particular tax year). Non-UK partners will be exempt from capital gains tax in respect of commercial property, and for residential property until April 2015.
Again, the non-UK resident limited partners will need approval under HMRC’s non-resident landlord scheme in order to receive rental payments from the property without the deduction of tax. In addition to the UK tax cost, there may also be tax in the jurisdiction in which the limited partners are resident.
As partnerships are “look-through” for UK tax purposes, the partners themselves are treated as directly owning their share of the underlying property. This means that where partnership interests are sold, Stamp Duty Land Tax (SDLT) may be payable on the acquisition of that interest (as it is treated as if the purchaser is buying a proportion of the underlying interest in land).
Non-UK Property Unit Trust (PUTs)
PUTs are transparent for UK income tax purposes, which means that any income arising to a PUT is treated as belonging to the unitholders and the PUT itself is not subject to UK tax on its income. Jersey (JPUT) and Guernsey (GPUT) are commonly used.
For capital gains tax purposes, a PUT is treated as a company. Provided the trustees are non-UK tax resident, and the PUT does not carry on a trade in the UK, as a matter of current law, the PUT should not be liable for UK capital gains tax on a disposal of the property. However, the UK is in the process of introducing capital gains tax for non-UK residents who dispose of residential property, unless the owning vehicle is “widely held”.
Non-UK corporate investors in a PUT will be subject to UK income tax at the basic rate (currently 20%) on their share of the net UK property income of the PUT (whether or not it is distributed). Non-UK resident individuals will be subject to UK income tax at the appropriate rates (0%, 20%, 40% or 45%).
Non-UK resident unitholders will need to apply for approval to receive rental income gross under HMRC’s non-resident landlord scheme.
Non-UK investors may also be subject to tax in the jurisdiction in which they are resident.
There is no UK stamp duty or SDLT on the issue of units in a PUT, or, generally, on the transfer of such units to a third party.
Real Estate Investment Trusts (REITs)
A REIT is a UK corporate vehicle which actively elects into the “REIT regime”, and which meets certain qualifying conditions. It must carry on a property letting business, its shares must be listed on a recognised stock exchange, it must own a minimum of three different properties and, in effect, it cannot have any corporate shareholder holding 10% or more of its shares.
Generally, any income and gains realised within the REIT business are not subject to UK tax. Instead, a REIT is required to distribute at least 90% of its annual profits within 12 months of the end of the relevant accounting period. These dividends are known as “property income dividends” and the REIT is required to withhold income tax at the basic rate (currently 20%) from these payments to investors. In this way, a UK REIT is able to mimic the tax treatment of a direct investment in UK property.
The taxation of non-UK resident shareholders will be governed by the legislation of the jurisdiction in which they are resident but they will not be entitled to repayment of the 20% tax withheld from distributions from HMRC, but they may be able to obtain credit in their home jurisdiction.
UK stamp duty, or stamp duty reserve tax, is payable at the rate of 0.5% on the sale of shares in a REIT.
Property Authorised Investment Funds (PAIFs)
A PAIF is an open-ended investment company (OEIC) which elects to join the PAIF regime (unlike a REIT, which is a closed-ended vehicle) and which satisfies certain conditions. It must carry on a property investment business and it must be “widely held”. No company may hold more than 10% of the shares of the PAIF.
The property investment business of a PAIF will be ring-fenced and the net income received from this ring-fenced business will not be subject to UK tax. The PAIF will not be subject to UK tax on any gains realised whether these are from its ring-fenced business or from its non-ring-fenced business.
The property income distributions paid by a PAIF are subject to a 20% withholding.
The taxation of non-UK resident shareholders will be governed by the legislation of the jurisdiction in which they are resident but they will not be entitled to repayment of any part of the tax withheld from distributions.
No stamp duty is payable on a transfer of shares in a PAIF. There is also no stamp duty reserve tax payable on surrenders of units.
Value Added Tax (VAT)
The UK levies a Value Added Tax (VAT) on the supply of certain goods and services. Generally, supplies of land are exempt from VAT so that no VAT is charged when a property or bought, or rented out. However, where a person makes exempt supplies, he will not be able to recover any VAT paid by him on goods and services supplied to him in respect of the property (‘input tax”). Accordingly, a land owner can make an election to “opt to tax” the land – which means that the supplies that it makes in respect of the land are subject to VAT. As a result, the land owner will be able to recover the related input VAT it incurs on costs.
This option to tax cannot apply in respect of residential property. However, where there is a sale (or grant of a lease of 21 years or more) by the person who constructed the building, the supply is “zero-rated” (taxable but at 0%) which enables him to recover the related input tax.
Generally, whether a property rental business is carried on by a UK entity, or by a non-UK entity (such as a PUT or a non-UK company), they will be able to register for VAT in the UK as they will be carrying on a business of property rental. This has the impact of reducing the overall costs to a business, and therefore helping with cash flows.
VAT is usually accounted for on a quarterly basis, with payments being made to or from HMRC in respect of the net VAT, being the difference between the amount of VAT that a business has charged, and the amount of recoverable VAT that the business has itself been charged in relation to supplies that it has used in the course of its business).
SDLT is charged on the acquisition of interests in UK real estate. The rate of SDLT depends upon the value of the property, whether it is a commercial or a residential building and whether, if it is a residential property, it is acquired through a corporate structure.
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Capital gains tax for non-residents: key points
- Gain arising on UK residential property held by non-UK residents may be subject to UK capital gains tax with effect from April 2015
- This does not affect commercial property
- The tax charge will not apply where the property holding vehicle is “widely held”
- The tax charge will only affect any increase in value from April 2015
- The rates of tax are 18% or 28% for individuals and 20% for non-UK companies