The question often arises for foreign purchasers of UK residential property as to how they should own the property.
For many years, buying in the name of an offshore company provided the optimum solution as the property would not be included in the buyer’s UK Inheritance tax estate and any net rental profits (if the property was let) were only subject to a maximum tax rate of 20%.
However, the tax landscape for UK residential properties has changed dramatically over the past 10 years such that there are now various new and expanded tax provisions that apply in connection with UK residential property.
Broadly, the options available for a buyer are now either to hold individually or via a company. Sometimes, a trust can wholly own the company or acquire the property direct, but this note will not cover the various tax issues associated with such a structure in any detail.
The ownership structure may be heavily influenced by whether the property is to be either let on a commercial basis or used by the family home (whether as a main home or for occasional use).
Any UK residential property held in a company (UK or overseas) is potentially subject to an annual ATED charge. ATED is a banded tax where the ATED charge is based upon the market value of the property on acquisition or at a time in a five-year cycle. The annual charges for the ATED year 1 April 2023 - 31 March 2024 are as follows:
Property value | Annual charge |
More than £500,000 to £1 million | £4,150 |
More than £1 million to £2 million | £8,450 |
More than £2 million to £5 million | £28,650 |
More than £5 million to £10 million | £67,050 |
More than £10 million to £20 million | £134,550 |
More than £20 million | £269,450 |
There are certain reliefs from ATED, the most common being where the property is let on a commercial basis to unconnected parties, which requires an annual relief claim to be filed.
SDLT is a tiered tax where rates have increased significantly over the past few years such that the minimum top rate for an individual purchase over £1.5 million is now 12%.
Where the purchaser already has another residential property, the general tiered rates increase by 3% and where the purchaser is non-resident (on a day count test – not the ‘normal’ statutory residence test), an additional levy of 2% is applied to all bands.
Accordingly, a top rate of 17% can apply in certain circumstances (see table below).
Band: market price £ | Basic SDLT rate | Higher SDLT rate: additional property owner/company* | Non-Resident | Non-Resident additional property owner/company |
Up to 250,000 | 0% | 3% | 2% | 5% |
250,001 - 925,000 | 5% | 8% | 7% | 10% |
925,001 - 1,500,000 | 10% | 13% | 12% | 15% |
over 1,500,000 | 12% | 15% | 14% | 17% |
UK resident companies liable to ATED (i.e where the property is not let to unconnected third parties) would however pay a flat rate of SDLT of % where the chargeable consideration exceeds £500,000.
Non-resident companies are subject to the additional non-resident levy and accordingly would pay a flat rate of SDLT of 17% in the same circumstances.
Before 6 April 2013, non-UK residents generally did not pay CGT on any gains realised on the disposal of UK assets. Between 6 April 2013 and 5 April 2015, an ATED-related CGT charge applied but since 6 April 2015, CGT has applied on any direct disposals by non-UK resident individuals or companies.
In addition, since 6 April 2019, CGT has applied on any indirect disposals of all UK real estate (i.e disposals of ‘UK property-rich’ companies). The CGT rates on any gains arising being 28% for individuals and between 19% to 25% for companies, depending upon the quantum of the gain.
Prior to 6 April 2017, UK residential properties held in an offshore company were outside the scope of IHT where the shareholder was non-UK domiciled. The same treatment applied where a Trust held the offshore company shares, where the Trust settlor was non-UK domiciled.
Since 6 April 2017, the net equity value of the UK residential property will essentially fall within the IHT net for the shareholder of the offshore company. Accordingly, any debt held within the company should be allowable as a deduction against the market value of the property.
It is therefore increasingly common for non-resident buyers to acquire UK residential property using loan finance rather than cash to reduce their IHT exposure.
Connected party loans will qualify as allowable deductions although the benefit of the debt will be an asset subject to IHT for the lender.
Any net rental profits received by an individual will be subject to Income tax at their marginal rate of tax (up to 45% where total income exceeds £150,000 pa), with mortgage costs only qualifying for relief at 20%.
Companies face between 19%-25% Corporation tax depending upon the level of net rental profits.
One advantage of using a non-resident company is that a non-resident individual can receive dividends tax-free from the offshore company, although the tax treatment of the jurisdiction where the individual is resident will need to be considered.
When deciding the structure for acquisition, a key question is what the property will be used for.
If the property is intended to be used by the family of the purchaser, then it is probably best not to acquire via a company but instead hold directly. This will ensure that ATED will be avoided and that the SDLT charge will, most likely, be lower than if a company acquired the property.
On any eventual sale of the property, any gain can be exempt from CGT where it was used as the owner’s only or main residence.
From an IHT perspective, it will not matter if the property is held directly by the non-resident individual or via an offshore company, due to the IHT changes that came in from April 2017. The IHT benefits of commercial funding should be weighed against the costs.
If the property is to be commercially let, a non-resident individual might consider using a non-resident company for the acquisition.
In these circumstances, if the ultimate owner already holds an overseas residential property, then the SDLT rates will be the same as those for an individual purchase and ATED will not apply due to the letting relief (although an ATED return will be required to be filed).
Any net rental profits will be subject to a maximum Corporation tax rate of 25%, where annual profits exceed £250,000, and any dividends can be extracted tax-free by the non-resident shareholder.
Using a company will however give rise to more onerous administration requirements than is the case where the property is held personally.
In conclusion, the simpler the structure the better as the individual will avoid a range of taxes and running costs during the period of ownership as well as the potential to avoid CGT on any disposal of the property. However, each case should be examined on its own merits.
Trusts can be useful where asset protection issues are important or where a large or uncertain number of beneficiaries is expected.
If you need help in considering how best to structure a purchase of a UK residential property, please contact our Tax Partner Phil Moss (PhilMoss@lubbockfine.co.uk), or Tax Director Aidan Meade (AidanMeade@lubbockfine.co.uk), or your usual Lubbock Fine contact.
