UK Residential Property - Structuring considerations for non-UK domiciliaries

By Aidan Meade, tax director

According to Coutts, for foreign-exchange buyers, prime London property is currently much cheaper than it was in 2014. For those in the Euro zone, it’s about 30% cheaper
and for those in the dollar zone, it’s around 40% cheaper. For UK buyers, prices are around 17% down from their high. Clearly this represents a buying opportunity. But savings made on the purchase price could actually be lost by having the wrong holding structure.

Prior to April 2017 and certainly before April 2013, the typical structure used for
holding a UK residential property for a foreign domiciliary was an offshore company. Not only was the property outside the UK inheritance tax net and no annual charge applied against the value of the property, but capital gains tax (CGT) would not be levied on the company following any sale of the UK property. The goalposts have moved.

With the Annual Tax on Enveloped Dwellings (ATED) charge introduced in April 2013, the Non-Resident CGT (NRCGT) regime in April 2015 and the ‘look through’ Inheritance Tax (IHT) provisions with effect from 6 April 2017, the landscape has dramatically changed for foreign domiciliaries when considering how such properties
should be held. The use of the property (personal occupation or rented) will also be an important factor when considering the ideal structure.

UK residential property – acquisitions

Stamp Duty Land Tax (SDLT) – individual
Currently, SDLT on residential purchases starts at 2% for properties costing more than £125,000 and increases on a ‘slice’ basis to a maximum of 12% (more than £1.5m) plus a potential 3% ‘surcharge’ on all rates where an additional property is purchased. As this ‘surcharge’ takes worldwide property into account, the 3% surcharge can apply to a first UK property purchase.

HMRC has announced that it is consulting on the introduction of a 1% surcharge to SDLT rates for UK residential property purchased by non-UK tax residents.

SDLT – company
Any property acquired for more than £500,000 will be subject to SDLT at 15% on the full purchase price unless it qualifies for a letting or property development relief.

UK residential property – occupation

Individual/trust
Ownership by an individual (or where owned directly by trustees) will not give rise to any ATED issues. Where the property is held by trustees, any rentfree occupation could give rise to a UK tax charge on the tenant in certain circumstances. Planning can be implemented to avoid such charges.

On any sale of the property where either held individually or by trustees, a CGT exemption (Principal Private Residence relief) should be available to exempt the gain if relevant conditions are met. For non-UK domiciliaries who are not actually living in the UK, the main residence exemption is only available in full if the owner or spouse spends at least 90 days physically present in the property every tax year. Non-qualifying years will restrict the available relief and so the 90 day requirement should be considered as part of planning for a non-domiciliary’s wider tax position.

Company
The ATED regime applies where companies (UK or overseas) hold UK residential property acquired for or revalued for more than £500,000. ATED returns will also need to be filed on an annual basis.

Benefit-in-kind charges may also apply where a connected person occupies the property for less than market rent.

UK residential property – letting

Individual
Individuals will be subject to any rental profits at their marginal rates of tax (i.e up to 45%). Since 6 April 2017, relief for mortgage interest is being

increasingly restricted so that from April 2020, only basic rate relief at 20% will be available. This could result in significant tax increases for
landlords – planning should be considered in order to potentially alleviate any such increases.

Trusts
Trustees will be taxed on any rental profits at 45% (20% for trustees of interest-in-possession trusts). The same mortgage interest restriction as individuals applies here.

Company
UK companies are subject to Corporation tax on any net rental profits at 19% (17% from April 2020). Overseas companies will be subject to the same regime from April 2020. Companies are not subject to the same mortgage interest restrictions as individuals although other interest restrictions apply where annual interest amounts exceed £2m.

ATED relief is available where the property is let to third parties.

UK residential property ownership – IHT
UK IHT at 40% applies to any UK residential property held directly.

Since 6 April 2017, IHT also applies to any UK residential property held via overseas companies.

Accordingly, such properties can no longer be protected from IHT which will also apply where an individual or trust holds the benefit of a loan used to purchase UK residential property.

In addition, there are IHT deeming provisions which mean that the proceeds from the sale of any such company shares or repayment of any loan will remain within the IHT net for a further two years.

Although these new IHT provisions are complex, planning can be considered to mitigate IHT in certain circumstances.

UK residential property – disposals

Individual
Principal Private Residence Relief (PPR) is available to wholly exempt any gains. Any period of ownership not covered by PPR will be subject to CGT at either 18% or 28% including any gains realised by non-UK resident individuals under the NRCGT regime. However, the base cost under the NRCGT regime will be its April 2015 value and not its original cost (unless otherwise elected for).

Trusts
Trusts are subject to the same rules as per the individual above.

Company
UK resident companies are subject to Corporation tax at 19% (17% from April 2020) on gains realised.

Since April 2015, overseas companies have generally been subject to NRCGT on direct
disposals of UK residential property – the base cost typically being its April 2015 market value.

With effect from April 2019, indirect disposals of UK residential property will be subject to UK tax. An indirect disposal will take place where the non-resident shareholder sells the shares in a company which is treated as a ‘property rich’ company (i.e a company that derives at least 75% of its gross value from UK land – can be residential or commercial). In addition, the shareholder must have held the shares for at least two years prior to disposal.

Summary
In essence, the choice of holding structure can really impact on tax liabilities from acquisition through to ultimate disposal of UK residential
property. In particular, the use of the property will be a key factor in determining the structure adopted.

Detailed consideration of all the issues are crucial when considering what is the ideal structure for a particular scenario. For further information planning to ensure that all relevant aspects are carefully considered, please speak to your contact partner or to Aidan Meade aidanmeade@lubbockfine.co.uk or Matt Spencer matthewspencer@lubbockfine.co.uk in our tax department.

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