Over recent years, the UK Government has introduced legislation that has made major changes to the taxation of UK residential property, particularly those acquired or held by companies or other non-natural persons (NNPs):-
- The 2012 Budget introduced the 15% rate of Stamp Duty land Tax (SDLT) on acquisitions of single dwellings valued at more than £2m held by companies and certain other non-natural persons; and
- The Annual Tax on Enveloped Dwellings (ATED) came into effect from 1 April 2013 for residential properties worth more than £2m held by companies and other non-natural persons. At the same time UK capital gains tax (CGT) was extended to disposals of such properties with effect from 6 April 2013.
- The 2014 Budget extended the scope of application of ATED to properties worth £1m or more with effect from 1 April 2015, and to those worth £500,000 or more with effect from 1 April 2016.
- From 6th April 2015 capital gains tax was extended to all non-resident individuals and entities disposing of UK residential property.
- It was announced in the 2015 Summer Budget that, from 6 April 2017, all UK residential property would be subject to UK inheritance tax (IHT), however owned.
Below is a summary of the main provisions of the recent legislation affecting UK residential properties; alternative holding structures for such properties are then discussed.
Annual Tax on Enveloped Dwellings (ATED)
The ATED is applied to certain NNPs owning residential properties valued in excess of £500,000. The charges for 2016/17 returns (due by 30 April 2016) are:
£500,000 to £1m
£1m to £2m
£2m to £5m
£5m to £10m
£10m to £20m
More than £20m
The initial valuation date for properties within the charge is 1 April 2012, or the acquisition date, if later. This valuation is relevant for the first five years and subsequent valuations must be provided every five years. The next valuation date is therefore 1 April 2017.
The NNPs which may be taxable under the ATED are restricted to:
- Companies, where that company has a beneficial interest in such a property (i.e. not where it acts as mere nominee for an individual);
- Partnerships, where one or more partners is a company; and
- Collective Investment schemes.
Trustees (including corporate trustees) are not subject to the ATED where they hold property directly.
ATED-related Capital Gains Tax (ATED-related CGT)
With effect from 6 April 2013 the CGT rules were extended to impose a new CGT charge on certain non-natural persons when they dispose of UK residential property. The extended charge applies to residential property within the scope of ATED and is referred to as ATED-related CGT. The rate of CGT applicable to disposals under these rules is 28%.
Where the property was purchased before 6 April 2013 but disposed of after that date, the extended CGT charge will only apply to the part of the gain which accrued on or after 6 April 2013, or the date from which the property became liable to ATED, if later.
Trustees, whether UK resident or not, are not within ATED-related CGT on direct disposal of such properties: the definition of NNP used for CGT purposes is the same as that used for the ATED. However, from 6 April 2015, non-resident trustees will be caught by the new CGT rules applying to non-residents (see below).
Important exemptions from the 15% SDLT rate, the ATED charge and the ATED-related CGT charge include:
- Properties acquired in the course of a property development business
- Properties let out as part of a property rental business where let to third parties on a commercial basis (in most cases this will exempt properties acquired as “buy-to-lets”)
- Farmhouses and properties held by trading companies for the use of employees
Capital Gains Tax for Non-Resident Owners of UK Residential Property
From 6th April 2015, all non-residents (including individuals, companies, partners and trustees) are subject to UK capital gains tax on gains arising from the disposal of UK residential property.
Only the portion of the gain arising after 6 April 2015 is chargeable to tax. The rates of NRCGT are 18% and 28% for individuals and trustees, and 20% for companies.
UK Inheritance Tax
Under proposals to be introduced from 6 April 2017, all UK residential property will fall within the scope of UK inheritance tax.
Many non-UK domiciled have traditionally held UK residential property through an offshore structure in order to avoid exposure to IHT. The shares in the offshore company, being non-UK assets, are excluded property for IHT purposes and therefore outside the scope of inheritance tax if held by non-UK domiciled individuals.
These rules are set to change from 6 April 2017 when shares in overseas companies holding UK residential property will be treated as UK assets, and will therefore become chargeable to UK IHT on the death of the owner, regardless of their domicile status.
Any UK IHT may potentially be minimised by securing a loan on the property but further advice should be taken.
Structuring New Purchases for Non-UK Residents
For new purchases of residential property, the use of a company as a beneficial owner is unlikely to be viable, unless that company can qualify for one of the ATED exemptions. It will be important to ascertain the goals of the investor in choosing a property ownership structure. In our experience, the main non-tax considerations are:
- Confidentiality/non-disclosure of ultimate beneficial owner
- Asset protection and succession planning (particularly when combined with a trust)
Alternatives to beneficial ownership by a company include:
- Personal Ownership
Property owned by one or more individuals is not generally subject to the ATED regime. However, the names of the owners will appear directly on the UK Land Registry which is publicly accessible.
From 6 April 2017, the property will be subject to UK inheritance tax at a rate of 40% on death.
Where a UK residential property is disposed of by a non-UK resident individual, any capital gain arising after 6 April 2015 will be chargeable to UK CGT at a top rate of 28%.
Profits derived from UK rental receipts will be taxable in the UK at an income tax rate of up to 45%, depending on the level of profit. If the property is being rented to third parties, it may be preferable to hold it through a non-resident company that qualifies for an exemption from ATED. The tax rate on the rental profits would then be capped at 20%.
- Ownership through a Nominee Entity
For an individual wishing to maintain confidentiality with respect to the beneficial ownership of residential property it is possible for a property to be purchased through a nominee company.
The main advantages of this approach are:
- The name of the company will appear as the legal owner at the Land Registry so there will be no publicly available record of the beneficial ownership of the property. Note that there are proposals to require individual ultimate beneficial owners to be disclosed at the Land Registry which would render a nominee owner ineffective for confidentiality purposes.
- The 15% Stamp Duty Land Tax rate, the ATED and ATED-related CGT charges will not apply to the company because it is purchasing the property in a nominee capacity; and
The same income, capital gains and inheritance tax analysis will apply as for personal ownership.
- Ownership through a Partnership
If the property is purchased through a partnership with no corporate member, each of the partners will be treated as owning a proportion of the property in accordance with their capital share and the property will not be within the ATED regime (unless the partnership is a collective investment scheme).
The partnership will appear as the legal owner at the Land Registry so there will be no publicly available record of the beneficial owner of the property (but see above in relation to proposed disclosure requirements).
The same income, capital gains and inheritance tax analysis will apply as for personal ownership as the partners are deemed to own their share of the property personally.
- Ownership through a non-UK Resident Trust
The general advantages of trust ownership are well known but the main benefit is that of asset protection. Property held directly by a trust is not within the ATED regime which means trusts still have a part to play in UK property structuring.
Following the extension of capital gains tax to non-residents from 6th April 2015, any capital gain arising from that date would be taxable on the non-resident trustees when the property is eventually disposed of, although exemption may still be available where the property is occupied by a UK-resident beneficiary as their main home.
The main disadvantage with direct trust ownership is the IHT position. A trust is subject to its own “mini” IHT regime. This regime imposes an IHT ‘entry charge’ on the net value of the property being transferred into trust, usually at a rate of 20% (gross) on the excess over the nil rate band (currently £325,000 per person). In addition, there is a (broadly) 6% IHT charge on the net value of UK-situs assets once every 10 years on the anniversary of the creation of a trust. If the property is occupied by the settlor of the trust then there are further IHT considerations and specific advice should be sought.
The trust will pay income tax at a rate of 45% on all profits derived from UK rental receipts; however, where rented to third parties a non-resident company may again be interposed so that the income tax rate is limited to 20% whilst the ATED exemption can be claimed.
ATED returns are due on 30 April each year, effectively in advance of the tax year. The return for the year ended 31 March 2017 was due on 30 April 2016 together with any tax payment by the same date. If the status of the property subsequently changes (for instance, a relief begins or ceases to be available part way through the year) an amendment may be filed with any tax adjustment either paid or refunded.
It should be noted that even entities which qualify for one of the above ATED exemptions (e.g. the rental or property development exemptions) will still have to file an annual ATED Relief Declaration Return to claim the relief, even though there will be a nil or reduced tax charge.
The purchase and holding of UK residential property now requires careful consideration. Depending on the goals of the investor, there are a range of structures which can provide tax efficiency whilst potentially maintaining confidentiality. Tax-efficient structuring is particularly enhanced by generous exemptions from the ATED regime which are available, but professional advice should be taken in each case.