Understanding UK property tax

Understanding the complete ins and outs of buying holding and disposing of UK property assets can be often overlooked which is mad considering the impact and cost it has on your overall investment. Transparency is the key word we stand by when selling UK real estate to overseas buyers.

We work hand in hand with one of the UK's top rated accountancy firms HWFisher to ensure clients are fully informed.

Please find everything you need to know when looking at UK property as an investment for your 2023 portfolio.

STAMP DUTY LAND TAX (SDLT)

SDLT RESIDENTIAL TAX RATES

SDLT CURRENT RATES?

The 3% surcharge applies across all the bands of SDLT.

The 3% applies unless the residential property that an individual purchaser acquires in the UK is their only worldwide residential property that they (or their spouse) personally own at the point of acquisition, or it replaces their main residence.

If a purchaser acquires a new property as their main residence and then sells their main residence within three years after the purchase of the new one, they can claim for a refund of the higher SDLT rate paid.

The 3% surcharge will always apply to a residential property purchased by a company and companies are also potentially caught by the 15% flat rate SDLT charge for certain acquisitions (see below ATED).

From 1 April 2021, there is a 2% SDLT surcharge applies to non-UK residents purchasing residential property in England and Northern Ireland, this applies to non- UK resident individuals, Trusts

and companies.

The 2% SDLT surcharge does not apply where contracts are exchanged before 11 March 2020 but completed or substantially performed after 1 April 2021, except where that contract has been assigned or substantially varied after 11 March 2020.

Variation or assignment includes any alteration to the proposed purchaser or the amount of consideration or the subject matter of the contract, including the addition of relatives or a spouse or even a company that you own. Some variations, such as the adjustment of the completion date, are too insubstantial to amount to a variation.

To determine whether an individual is UK resident or non-UK resident for the purposes of the 2% SDLT surcharge, the Statutory Residence Test (SRT) is ignored, and the specific rules set out in the SDLT legislation are followed.

Under the specific rules, an individual will be non-UK resident if they spend less than 183 days in the UK in the 12 months prior to the property purchase.

A refund of the 2% SDLT surcharge can be claimed within 2 years following the date of completion if the individual becomes UK resident (according to the SDLT rules) within 12 months of the purchase.

The residency surcharge test provides that an individual is UK resident if that individual is present in the UK for at least 183 days during any continuous period of 365 days that:

• Begins with the day 364 days before the completion date of the chargeable transaction: and
• Ends with the day 365 days after the effective date of the chargeable transaction.
• For married couples and civil partners living together at the date of completion purchasing property jointly, they will both be treated as UK resident even if only one of them satisfies the UK residency rules set out above.
• With regards to corporate purchasers, the normal tax residency rules apply to determine the residence of a corporate purchaser.
• A company is non-UK resident for the purpose of the 2% surcharge is where:
• The company is not UK resident for the purpose of the Corporation Tax Acts at the date of completion. i.e. it is neither incorporated in the UK nor managed and controlled in the UK;
• The company is a UK resident company controlled by 5 or fewer participators who do not individually satisfy the UK residency test for individuals as set out above.?

In practice this means looking through the company to determine the position of the shareholders and the 2% surcharge cannot simply be avoided by using a UK company to acquire the property. Whilst these rates may increase up-front acquisition costs for non-UK resident purchasers and purchasers of second homes, purchasers can claim the increased SDLT as a deduction against the capital gain arising on a subsequent disposal of the property.

Broadly, a SDLT return must be submitted within 14 days after completion and payable within the same time frame.

RESIDENTIAL PROPERTY ACQUIRED BY COMPANIES AND OTHER

‘NON-NATURAL PERSONS’

The aim of the legislation is to prevent mitigation of SDLT by buying residential property through a company or similar ‘wrapper’.

A penal rate of 15% applies to residential property acquired by companies, partnerships where any member is a company, or for the purpose of a collective investment scheme, where the property value exceeds ￡500,000.

No account is taken of the mixed nature of other property acquired, multiple dwellings relief (see below), or the deeming of a single contract for purchase of six or more dwellings to be non- residential property.

This enhanced Stamp Duty rule forms part of the Annual Tax on Enveloped Dwellings (ATED) provisions and will only apply to residential property bought in a company name for self-use (or that of a family member) where the property value exceeds ￡500,000.

As explained in the ATED section below, there are exemptions from ATED, which also extend to the flat 15% SDLT rate and must be claimed on the SDLT return filed by the purchaser.

Relief from the 15% charge will be clawed back or withdrawn, if the use giving rise to the relief does not continue to apply in the three years following the date of acquisition.

Where one of the ATED exemptions applies, the usual progressive basis of SDLT is used to calculate the tax due, rather than the flat 15% rate.

MULTIPLE DWELLINGS RELIEF

For this relief to be available, the dwellings must be purchased at the same time and from the same seller (or persons connected with them). The relief will also apply to the acquisitions of several apartment leases, as well as freehold or head lease interest in a number of apartments, provided that the lessor interests when granted did not have an initial term of more than 21 years.

The relief identifies the average price paid for the residential units and SDLT is then determined based on that average price rather than to on the price of each unit individually (with a minimum charge of 1%). This rate is then applied to the total consideration paid for the residential units.

If any of the properties are sold within a 3-year period of Multiple Dwellings Relief being claimed, the SDLT payable on the remaining properties needs to be recomputed and any additional SDLT paid over.

This relief does not apply where the ATED rules apply.?

ACQUISITION OF 6 OR MORE DWELLINGS IN A SINGLE TRANSACTION

A deeming rule applies to the transfer of six or more dwellings in a single transaction which treats them collectively as non-residential for SDLT purposes and the lower non-residential rates will be applicable on the total whole consideration to be paid.

The non-residential rates are as follows:

• On the purchase price between ￡0 and ￡150,000: 0%
• On the purchase price between ￡150,000 and ￡250,000: 2%
• On the purchase price in excess of ￡250,000: 5%
• The 2% non-resident SDLT surcharge will not apply to transactions deemed as non-residential transactions as it only applies to residential property.
• ANNUAL TAX ON ENVELOPED DWELLINGS (ATED)
• ATED applies to UK residential property wholly or partly owned by non-natural persons (i.e. companies but not trusts) valued in excess of ￡500,000.
• Properties must be revalued every five years. The next set of valuations required for all existing properties owned at 1 April 2017 will be 1 April 2022 and will affect those ATED returns due for filing by 30 April 2023 for the period from 1 April 2023 to 31 March 2024. For properties purchased after 1 April 2022, the revaluation date is 5 years from the purchase date.
• Companies liable to ATED charges are required to self-assess the charge due by filing an annual ATED return.
• The starting point is that all residential properties owned by non-natural persons are caught under the ATED rules.
• However, exemptions from the charge are available by reference to use of the property, when the property is:

1. let to a third party on a commercial basis and not, at any time, occupied by anyone connected with the owner;
2. open to the public for at least 28 days a year;
3. being developed for resale by a property developer;
4. owned by a property trader as the stock of the business for future resale;
5. repossessed by a financial institution as a result of its business of lending money;
6. being used by a trading business to provide living accommodation to certain qualifying employees;
7. a farmhouse occupied by a farm worker or a former long-serving farm worker;
8. owned by a registered provider of social housing.?

Except for the relief for being open to the public, no reliefs are available if the property is occupied by a connected party, such as a family member, even if market rent is paid for their use or occupation.

Please note that it is necessary to file the annual ATED relief tax return in order to claim an exemption, as they do not apply automatically.

The due date for filing ATED returns and paying the charge is 30 April annually. ATED Returns and payments are made in advance. There are penalties for late filing and non-compliance.

If you buy a property during the year which is subject to ATED you are required to file the return and make payment (or claim the exemption) within 30 days of acquiring the property.

The deadline is extended to 90 days in respect of newly built property and it is then within 90 days of the earliest of the date of first occupation and the date that the property is registered for Council Tax.

The annual chargeable amounts are as below:?

TAX ON RENTAL PROFITS

SCOPE OF CHARGE?

Income Tax is charged upon UK rental profits arising for individuals and trustees irrespective of their residence and domicile status.

Companies (both resident and non-UK resident) are liable to UK corporation tax on their rental profits.

Tax is charged on rental income after deduction of relevant tax-allowable expenses (see later).

In addition, those persons who are involved in dealing or developing UK land are liable to income tax or corporation tax on their profits, irrespective of the provisions of certain double tax treaties and whether they have a permanent establishment in the UK or not.?

PERSONAL ALLOWANCES

All British citizens (irrespective of tax residency status) are entitled to a UK personal allowance, which is the amount of tax-free income that each individual is entitled to receive.

The UK personal allowance is ￡12,570 for tax year 2022/23 from April 2022. The level of personal allowance has been frozen until April 2026.

In addition, the following individuals are also entitled to claim UK personal allowances (a non-exhaustive list):

• EEA Nationals
• Individuals who are resident and nationals of Thailand and Malaysia
• Residents and nationals of the following countries will only qualify for UK personal allowances to the extent that they also hold full British (or other EEA) citizenship:
• China
• Hong Kong
• Singapore
• Dubai (and other UAE Citizens)
• Saudi Arabia
• USA
• Residents in other countries will need to have regard to the bilateral tax agreement between the UK and their country of residence.
• However, personal allowances are reduced by ￡1 for every ￡2 of income earned in excess of ￡100,000, so anyone earning rental profits in excess of ￡125,140 cannot benefit from a personal allowance irrespective of their residency status.
• Trusts and companies do not benefit from a UK personal allowance.?

REPORTING

INDIVIDUALS

Individuals must report their income, expenses and net rental profits on Self-Assessment Tax Returns that are due for submission to HM Revenue & Customs by 31 January following the end of UK tax year. A UK tax year runs from 6 April to the following 5 April.

Any income tax payable by non-UK resident individuals is due for payment by the tax return filing date, i.e. 31 January (if submitted online) following the end of the relevant UK tax year.

In addition, such taxpayers are usually required to make payments on account of next year’s tax liability in two equal instalment in advance.

The payments are due by 31 January during the tax year and 31 July following the end of the relevant tax year. Each instalment is equal to 50% of the previous year’s liability.?

COMPANIES

Companies report their profits on Corporation Tax Returns which are due for submission within 12 months from the end of the accounting period.

Corporation tax is usually payable 9 months and 1 day after the end of the accounting period after the end of the company’s accounting period.

Large companies and very large companies are required to pay by instalments. For large companies with profits between ￡1.5 million to ￡20 million, payments are due in four instalments starting 6 months after the beginning of the company’s accounting period; for very large companies with profits more than ￡20 million, in four instalments starting 2 months after the beginning of the company’s accounting period.

For the first year’s accounts for non-UK resident companies, the company will need to prepare accounts usually from the date of incorporation ending either on their year-end date or 5 April 2023 where there is no fixed year end date.

E.g: For a company that has a year end of 31 December 2022, the first period will therefore run from the date of incorporation to 31 December 2022. The tax payment date will be 1 October 2023 (if it falls outside the scope of large or very companies) and the filing deadline will be 31 December 2023.

In addition to filing a company tax return, non-UK resident companies need to file accounts showing a profit and loss account as well as a balance sheet together with the company’s tax return in a specific format.

WORKING OUT THE PROFIT

In calculating the net profit, the expenses that can be offset against the gross rent include:

1. Costs of repairs and maintenance (expenses incurred prior to first letting to put the property into good order may be allowable);
2. Agent’s fees for managing the property;
3. Service charges and other expenditure on common parts;
4. Insurance premiums;
5. Legal costs of renewing a short lease or tenancy agreements;
6. Accountancy fees for preparing accounts and tax computations;
7. A ‘renewals’ basis applies to rental properties with effect from April 2016. There is no deduction for the initial installation of furniture, but the costs of replacements can be claimed. This will include fixtures such as baths, washbasins and kitchen units.
8. Any unrecovered VAT on the above items.

For individuals and Trustees, tax relief on finance costs is restricted to 20% of the total finance costs incurred in the year and this is deducted from the tax due on the rental profits. Any excess finance costs are rolled forward to the next tax year.?

In practical terms, these measures do not affect basic rate individual taxpayers, whose net rental profits, before deduction of interest, fall within the 20% rate band (i.e. less than ￡37,700 of profit as stated above), nor will it affect companies, who will be able to get 100% tax relief under Corporation Tax rules.

To illustrate this change and how it will affect the amount of tax due by a higher rate (40%) taxpayer when the measures take full effect, please refer to the example below:

This example assumes an individual with no UK personal allowance who has ￡45,000 of gross rental income, ￡5,000 of expenses and ￡30,000 of mortgage interest payable:?

TAX ON DISPOSALS

INDIVIDUALS AND TRUSTEES

All individuals and Trustees are required to report direct and indirect disposals of UK residential property within 60 days following completion of the sale and pay any Capital Gains Tax (CGT) due within the same time frame. A UK residential property interest includes an assignment of a contract of an off-plan residential unit.

Each individual is entitled to an annual exemption from CGT. This is separate to the personal allowance for income tax and is not dependent on the individual’s jurisdiction of nationality or residence.

The annual exemption for 2022/23 is ￡12,300. From April 2023 this allowance will reduce to ￡6,000 and from April 2024 will reduce to ￡3,000.

Trustees also benefit from 50% of the individual annual exemption being ￡6,150 currently and this will reduce to ￡3,000 from April 2023 and ￡1,500 from April 2024.

Disposals can take the form of a sale to a third person for consideration or a gift to a family member, although gifts between spouses are exempt from CGT.?

A capital gain on a disposal of a UK residential property is ordinarily calculated by taking the disposal proceeds (decreased by any incidental costs incurred on the disposal, e.g. estate agents’/ solicitors’ fees) and deducting from them the cost of that property on exchange (increased by such incidental cost incurred on an acquisition – the incidental costs on acquisition would also include SDLT) and any enhancement costs, such as capital improvements to the property, conversions, alterations etc.

However, there are special rules where a UK residential property is directly owned by a non-UK resident person where the property was acquired before 6 April 2015.

These special rules only require that non-resident CGT is paid on the difference between the proceeds received on a disposal and the value of the property as at 5 April 2015 (known as ‘rebasing’). It is also possible to elect to time-apportion any capital gain between the pre- and post- April 2015 periods, with the former exempted from tax.

For disposals of indirectly held property, i.e. a disposal shares in a company that holds UK residential property, they can rebase the share value to 5 April 2019. For a gain on the disposal of an indirect holding (e.g. shares in a company or units in a collective investment vehicle) to come within the scope of CGT, certain conditions need to be met. The conditions are broadly that:

• the non-UK resident person (together with connected parties) has a 25% interest (or has done within the last two years); and
• at least 75% of gross assets is represented by all UK immoveable property (i.e. not just residential properties).
• This measure is subject to the specific provisions of the UK’s Double Tax Agreements with the country where the person is resident.
• COMPANIES
• Both UK resident and non-UK resident companies pay corporation tax on disposals of UK residential property. Non-UK resident companies can still rebase the value of their UK residential property assets as at 5 April 2015.?

RATES OF TAX

INDIVIDUALS

For non-UK resident individuals, tax will be applied at a rate of 18% to the extent that their overall income and gains falls within the basic rate band (of ￡37,700) and 28% thereafter.

If property is used as the main residence, a gain realised on a disposal of such a property (including land of up to half a hectare or such larger area as is required for reasonable enjoyment of the residence) is fully covered by Private Residence Relief (PRR) and, consequently, exempt from CGT.

It is also possible for a non-UK resident individual to claim PRR for a tax year provided that the property is occupied by them for at least 90 nights during that tax year. Time spent in other UK properties owned by the individual can be aggregated for this purpose.

If the UK property is that individual’s second home, a formal election should be submitted to HM Revenue & Customs to elect for that property to be a main residence to secure this relief in the future on parts of the gain that relate to the periods of main residence occupation. However, notwithstanding this, non-UK residents can delay an election for a property to be their main residence until submission of their non-resident CGT return.

COMPANIES

Both UK resident and non-UK resident companies are liable to corporation tax at a rate of 19%. This will increase to 25% from April 2023 on profits exceeding ￡250,000 as outlined earlier.

Properties owned prior to 31 December 2017 may benefit from indexation relief, designed to give inflationary relief based on cost.

Companies cannot claim PRR, even where the property is occupied by a director or shareholder.

TRUSTS

Trusts are liable at a flat rate of 28% and can benefit from half of the annual exemption available to individuals (￡6,150 for 2022/23), as outlined earlier.

REPORTING

INDIVIDUALS

Both UK residents and non-UK residents disposing of a UK residential property interest will need to notify HMRC within 60 days following completion of the sale and pay the tax due within that timeframe.

Non-resident CGT (NRCGT) returns must be submitted even where there is no tax payable.

Where properties are held jointly, each owner is required to submit a NRCGT return in respect of their share of the disposal.

Penalties apply for late filing and payment of the tax.

COMPANIES

There is no 60 days filing requirement for companies, who instead report any disposals on their UK company tax return that is due 12 months after the year end on their company tax return.

Any tax due will usually be payable 9 months and 1 day after the year end, or by instalments if it is a large company or a very large company as stated above?

INHERITANCE TAX (IHT)

IHT is charged in the UK upon the death of an individual in respect of assets owned at the date of their death and any gifts in the preceding 7 years. IHT is charged on both individuals and Trusts as follows:

INDIVIDUALS

The estate of an individual not domiciled in the UK is subject to IHT on their UK situated assets, such as directly and indirectly held UK residential property assets.

Indirectly held UK residential property interests include the following:

• Shares in an overseas company to the extent that the company owns UK residential property unless that company satisfies the GDO requirements (broadly controlled by more than 5 persons).
• A share of a partnership that owns UK residential property.
• A non-bank loan provided to finance the purchase of UK residential property or
• collateral provided for such a loan.
• In addition, the legislation includes an extension to the IHT charge for a period of 2 years, after a sale of shares in a company or interest in a partnership that owns a UK residential property. Any such consideration received, even if reinvested offshore, remains within the scope of IHT for the 2-year period.
• This does not apply to individuals who sell a property, nor does it apply where a company or partnership sells a UK residential property and subsequently repatriates the proceeds of sale overseas.
• Chargeable events include where an individual directly owns UK residential property, as well as the following events:
• The death of an individual who owns any UK residential property interest, as defined above, at the date of their death.
• The death of an individual who has made a gift of a UK residential property interest within 7 years prior to their death.
• The transfer of a UK residential property interest to a Trust.

Residential properties specifically excluded from IHT include care or nursing homes, any buildings with 15 bedrooms or more which have been purpose-built for student accommodation and are occupied by students, as well as prisons and military accommodation.

Shares in a UK company are UK situated assets and the entire value attributable to such shares forms part of the deceased’s Estate, not just that part of the value attributable to UK residential property.

IHT is currently charged at 40% on the total value of the estate, less the first ￡325,000 (known as the ‘nil rate band’ or ‘NRB’) which is tax-free.?

Gifts between spouses are usually exempt from IHT, so on first death where all assets are left to the surviving spouse, no IHT charge would arise. In addition, the unused portion of an individual’s NRB can be transferred and utilised on the death of their spouse. It cannot be transferred to any other family member or to an unmarried partner tax free.

There can be a restriction where the deceased is domiciled in the UK and makes a transfer to a non-domiciled spouse. In such a case the spousal exemption is restricted to ￡325,000, in addition to the NRB. To benefit from unlimited spousal relief, it is possible for a non-UK domiciled spouse to elect to be treated as a UK domiciled spouse for IHT purposes only.

An enhanced NRB is available where one of the assets in the deceased’s estate is the main residence. It is unlikely that this will benefit overseas investors as the UK residential property is unlikely to satisfy the conditions to be properly regarded as the main residence.

The value of the asset when calculating the IHT due is the equity in the property – being the market value at the date of death less any outstanding mortgage. To obtain this loan deduction for IHT purposes, the property needs to have been bought at the outset with mortgage finance or a mortgage taken out later to enhance the property or purchase other chargeable UK assets.

However, no deduction is given for any debt incurred on a property where it is incurred to acquire assets that are not chargeable to, or are relievable from, IHT. Thus, no IHT relief is normally available for a debt where a property is acquired for cash and a mortgage taken out subsequently to acquire say non-UK assets which are outside the scope of IHT.

One form of planning for any future IHT liabilities is by acquiring low-cost life insurance policies or by gifting an interest in the property to prospective beneficiaries. However, for such gifts not to fall within the charge to IHT tax in the future, the donor must survive at least 7 years and not benefit from the assets gifted.

RESIDENTIAL PROPERTY OWNED BY TRUSTS

The IHT legislation on UK residential property interests will also affect those individuals who have established Trusts to acquire UK residential property through non-UK structures. Under the legislation, in addition to UK residential property directly owned, Trusts will face IHT charges in respect of such UK residential property interests based on the revised definition above,

so including:

• Shares in an overseas company to the extent that the company owns UK residential property unless that company satisfies the GDO requirements.
• A share of a partnership that owns UK residential property
• A loan provided to a company or individual to finance the purchase of UK residential property
• The 2-year extended period where a UK residential property interest is sold
• The amount of charge is based on how much of the market value of the UK residential property interest owned by the Trustees is attributable to the underlying UK residential property.
• As for individuals, shares in a UK company are UK situated assets. Thus, the entire value attributable to the shares forms part of the Trust assets liable to IHT and not just that part of the value attributable to UK residential property.?

An IHT charge usually arises under the following circumstances:

• On the 10-year anniversary from the creation of the Trust
• On a transfer of assets from the Trust to a beneficiary
• The legislation did not include any grandfathering or exemptions from these new rules for Trusts created prior to April 2017.
• In addition, under the legislation there can be further IHT issues where the original settlor retains an interest in a Trust created prior to April 2017. In such a case, the value of the assets will be exposed to IHT in the settlor’s own Estate and will also be exposed to the IHT charges relevant to Trusts as outlined above – so potentially a double charge to IHT.?

REGISTRATION OF OVERSEAS ENTITIES

On 15 March 2022, in response to Russia’s invasion of Ukraine, the Register of Overseas Entities has come into existence under the Economic Crime (Transparency and Enforcement Act) 2022.

The new rules apply to all overseas entities who invest in UK land and property, including:

• An overseas company or partnership or other similar legal entity
• An Individual who is the beneficial owner of an overseas entity A person will be a beneficial owner of an entity if they:

1. hold more than 25% of the shares or voting rights in that entity;
2. have the right to appoint or remove the majority of the directors of that entity; or
3. have the right to exercise, or actually do exercise, significant influence or control over that entity.

An overseas entity needs to identify its beneficial owner(s) and register with Companies House in the UK.

Entities cannot themselves make such a notification, the notification to Companies House must be made by an appropriately authorised individual. HW Fisher can assist you in complying with

this requirement.

Once registered, an overseas entity ID number will be issued, and the entity will need to submit annual statement to Companies House.

Overseas entities that already own land or property in the UK have until 31 January 2023 to register.

The rules will apply retrospectively to land or property acquired after 1 January 1999 in England and Wales and since 8 December 2014 in Scotland.

REGISTRATION REQUIREMENTS

To register, the entity will need to supply the following information:

1. name;
2. country of incorporation or formation;
3. registered or principal office;
4. a service address;
5. an email address;
6. the legal form of the entity and the law by which it is governed;
7. any public register in which it is entered and, if applicable, its registration number in that register.?

In addition, the information required in respect of the beneficial owner(s) is as follows:

1. name, date of birth and nationality;
2. usual residential address;
3. a service address;
4. the date on which the individual became a registrable beneficial owner in relation to the overseas entity;
5. which of the definitions of a beneficial owner is met in relation to the registrable beneficial owner and a statement as to why that condition is met;
6. whether the individual meets that condition by virtue of being a trustee;
7. whether the individual is a designated person (within the meaning of section 9(2) of the
8. Sanctions and Anti-Money Laundering Act 2018), where that information is publicly available.

Any foreign entity disposing of residential property from 28 February 2022 must also submit their details at the point of sale.

Failure to comply with the Act’s registration obligations will constitute a criminal offence for both the entity and, importantly, each officer of that entity. The offence will be punishable by a daily fine (not exceeding ￡2,500), imprisonment of up to five years, or both.?