There have been several changes in recent years to the taxation of non-residents owning UK situs property. The most recent change came into effect on 6th April 2015 when capital gains tax was extended to non-resident owners (including trustees, partnerships and companies) of UK residential property. Gains on UK commercial property realised by non-residents remain outside the charge.
Please note a non-UK resident who trades in UK property may be subject to UK taxation on profits. Not all property purchases are for investment. See further details below.
Until recently, it was standard tax planning for non-resident beneficial owners to use an offshore company to own the UK property although recent legislative changes including the introduction of the ATED (Annual Tax on Enveloped Dwellings) regime now make this method of ownership much less attractive for residential property investments.
UK Taxation on Income
Any rental income received on letting the UK property is taxable in the UK. The tenant, or UK letting agent where there is one acting, is responsible for deducting tax from the net rent at the basic rate, (currently 20%), before paying the balancing rent over to the non-UK resident landlord. This tax is then paid to the Collector of Taxes quarterly.
However, non-resident landlords can apply to H M Revenue & Customs for approval to receive their rental income without deduction of tax if one of the following applies:
- Their tax affairs are up to date
- They have never had any UK tax obligations, or
- They expect not to be liable to UK income tax
The landlord is expected to complete a non resident landlord self-assessment tax return for each tax year (6 April – 5 April) during the period of ownership. The return will show details of rental income and related expenditure together with details of any other UK source income and a calculation of the liability for that period. This return should be completed by the non-resident landlord whether they are taxed under the non-resident landlord scheme or not.
An individual may be entitled to personal allowances depending on where they are resident or whether a double tax agreement applies. The income tax rates applicable to an individual in receipt of UK rental income will range between 20% and 45% whereas a non-UK resident company will suffer tax on the net income at a fixed rate of 20%. Any tax withheld by the tenant or letting agent will be offset against the total liability and a repayment will be made if the tax withheld exceeds the liability.
Where any non-UK resident entity is owned by a UK resident individual, whether UK domiciled or not, the net rental income generated can be attributed to that individual in certain circumstances. Where additional taxes would be payable had the individual received the rental income direct, that additional amount will be due.
For the first period, the income tax is due on 31 January following the end of the tax year in which the income arose. If this amounts to more than £1,000 then payments on account must be made on the same 31 January and the following 31 July accordingly. Each payment will equate to half of the previous year’s liability as per the example below:
A property is rented out with effect from 1 October 2015. Say the net rental income for period 01.10.15 – 05.04.16 is £10,000. The tax liability for the tax year 2015/16 is £10,000 @ 20% which is £2,000. As this is more than £1,000 payments on account are due. Payments are therefore as follows:
|31 January 2017||2015/16 liability||£2,000|
|31 January 2017||2016/17 1st payment on account||£1,000|
|Total due on 31 January 2017||£3,000|
|31 July 2017||2016/17 2nd payment on account||£1,000|
Whatever the 2016/17 liability, the company will have already paid £2,000 towards it, (being the two payments of £1,000). The balancing payment/repayment will be made on the following 31st January, (i.e. 2018) together with any payment on account for 2017/18 and so on.
We deal with a number of non-resident landlord schemes. The Tax department can arrange for the relevant registration under the scheme and the filing of the self assessment tax returns.
UK Letting Agents
In many cases a corporate letting agent, usually an Estate agent who organises the tenancy will also act as the rental agent. Alternatively, we can appoint an in house UK company to act as the agent.
Agents acting for non-UK resident landlords are entitled to deduct qualifying expenses that they settle on behalf of the non-UK resident landlord before calculating the basic rate tax to be deducted. The net payment made to the landlord will therefore be the rent collected less the expenses and income tax paid.
Qualifying expenses are those reasonable expenses connected with maintaining and repairing a property i.e. cleaning, insurance, light and heat, rates, small-scale decoration and repairs. Improvements or rebuilding are not generally allowed as a deduction against the rental income received, but can be deducted against any chargeable gain on a future disposal.
Where properties are let out furnished, the cost of replacing furnishings and appliances is allowable as a deduction against the rental income.
Allowable expenses also include interest on loans to finance the property acquisition. Where an additional loan is taken out after the property purchase, the increased loan interest may also be deductible, provided the total loan value does not exceed the value of the property when the letting first commenced. Arrangements to provide for an interest charge against the property are appropriate where the rental income received is significant.
In these circumstances the client may wish to arrange a loan secured on the property or/and by guarantee. The loans should be structured in a way that ensures there is no withholding tax on the interest payments.
From 6th April 2017, relief for mortgage interest payments will be restricted so that it will no longer be possible to deduct the entire costs of the interest payments from taxable income. The restrictions will be phased in over the next few years so that by 6th April 2020, all finance costs will be given as a basic rate tax deduction (currently 20%) against the tax liability rather than as a deduction against the rental income.
Companies are not affected by these restrictions.
Capital Gains Tax
Since 6th April 2015, all gains arising on UK residential property held by non-residents (whether as an individual, company or partnership), are liable to capital gains tax, regardless of the value of the property. However, in most cases only the portion of the gain arising after 6th April 2015 is taxable.
Certain exclusions apply for boarding schools, nursing homes, and some types of student accommodation.
The deadline for reporting the gain is 30 days from the date of conveyance, and payment of the tax will also need to be made by this date if the taxpayer does not ordinarily file UK tax returns.
The rate of capital gains tax for individuals, trustees and partners is 18% to the extent that the gain falls within the taxpayer’s basic rate band and 28% on the excess. For corporate entities, the rate is currently 20%.
Generally assets of a non-UK domiciled individual would not be within the charge to UK inheritance tax. This, however, is not extended to property or other assets situated in the UK.
Therefore, if the property is directly owned by the beneficial owner the property will be subject to a UK inheritance tax charge even though the individual is neither UK resident nor domiciled.
Historically, it has been possible to take a UK property out of the scope of inheritance tax by using an offshore company to own the property. However, as far as UK residential property is concerned, this type of planning will no longer be effective for UK inheritance tax under proposals likely to be introduced from April 2017 which will bring all UK residential property within the scope of inheritance tax, regardless of the ownership structure. Inheritance tax is charged at 40% over an exempt amount (currently £325,000 per individual).
In relation to existing structures holding UK residential property, advice should be taken as soon as possible to assess the impact that these proposals will have on the tax efficiency of the structure and whether any restructuring should take place as a result.
For new purchases of UK residential property, advice should be sought on alternative ways of mitigating UK inheritance tax.
It should be noted that the proposals do not affect commercial property. Ownership of UK commercial property through a non-resident company may therefore still be an attractive proposition for mitigating UK inheritance, particularly where one of the ATED (Annual Tax on Enveloped Dwellings) reliefs is also available.
If the non UK company or individual owner buys and sells or develops and sells a number of properties then this may be considered as a trading operation. In this instance the profits may be subject to UK taxation.