Offshore investors in UK real estate face a range of tax obligations and charges to be managed. This briefing introduces some of the key tax aspects for investors using various offshore structures.
UK tax on gains
Gains realised by non-residents on the disposal of commercial (non-residential) UK real estate are still tax free for non-UK investors. Gains on the disposal of residential real estate by non-UK resident individuals and trusts are subject to tax at rates of 18% and/or 28%. Non-UK resident companies that are ‘narrowly controlled’ are subject to tax on such gains at 20% and/or 28%.
UK tax on income
Net rental income after deductions (see below) is chargeable to UK income tax and calculated on an accruals basis. The rate of income tax depends on the type of investor. Offshore companies are subject to a 20% rate. Non-resident individuals and trusts are subject to progressive income tax rates of up to 45%.
Annual tax on enveloped dwellings (ATED)
An annual tax can apply to dwellings worth over £500,000 owned other than by individuals. Commercially let properties are generally exempt but exemption must be claimed. If exemption is not claimed, the liability depends on the valuation band of each dwelling and ranges from £3,500 (at a value of £500,001) to £218,200 (at values exceeding £20m). Annual returns (including claims for exemption) and tax payments are generally due by 30 April.
Interest on loans incurred wholly and exclusively for a UK rental business is generally deductible in calculating taxable income. Restrictions apply where the rate charged is not at ‘arm’s length’ and on commercial terms. A restriction for the deduction of interest for corporate groups incurring interest charges exceeding £2m is currently under consultation and may apply from April 2017. A restriction in the rate of relief to 20% is being phased in for individuals from 6 April 2017 onwards in respect of residential property letting. Interest payments may be subject to withholding at a rate of up to 20%. Structuring debt to take advantage of exemptions may be possible.
Generally, depreciation is not deductible from taxable income. Tax depreciation may be available for some fixtures, plant and machinery in commercial properties and certain multiple occupancy residential properties. Determining what amounts can be claimed on a property acquisition or refurbishment project can be complex and, where previously claimed, the benefit of tax depreciation can be withdrawn on a disposal of the property. Specific advice on acquisitions and disposals is essential.
Repairs and renewals
In general, costs of repairing a property and items representing fixtures are allowable in calculating net rental income. Since April 2016, a deduction is available for the cost of replacing loose items of furniture in residential properties but only to the extent that the replacement items do not represent an improvement on what is being replaced.
In general, unless properties are held by more than one entity, rental profits and losses across properties can be offset. Where there are excess losses in any year, these are carried forward and set against future rental profits. Tax administration: non-resident landlord scheme An annual tax return is required, assessing net rental profits for each tax year (6 April to the following 5 April). This return must be submitted by 31 January following the year of assessment. For example, the tax return for the tax year to 5 April 2016 must be submitted by 31 January 2017. Advance agreement can be obtained for tax liabilities to be settled in three instalments payable on 31 January during the relevant tax year and on 31 July and 31 January following the tax year. If an advance agreement is not obtained, the UK agent or the tenant will be obliged to withhold 20% of the rent payment and pay this to the tax authorities. Interest and penalties are generally payable in the event of late payment of tax or late submission of returns.
Value added tax (VAT)
Generally, rents from residential property are exempt from VAT (currently 20%). Commercial property is generally exempt, but an election can be made to enable VAT to be charged. In making an election, thought needs to be given both to whether the seller has previously made an election and also to the VAT position of the tenant and that of any future purchaser.
New builds are subject to special rules
Where a property is exempt, no VAT is chargeable on the rent or disposal consideration and VAT suffered cannot be reclaimed. However, where a formal ‘option to tax’ the property is made, VAT is chargeable on the rent and sales consideration but VAT suffered on expenses and on acquisition can be reclaimed. In certain situations, recoverability of VAT may be restricted.
Stamp duty land tax (SDLT)
SDLT is chargeable on the acquisition of UK property. Most commercial property is charged at progressive rates of up to 5%. Most residential property is charged at progressive rates of up to 12% but in many cases these rates will be increased by a further 3% for all purchases by companies and for purchases by individuals where the individual owns more than one residential property following the transaction. Residential property acquired for consideration in excess of £500,000 and owned other than by an individual can be charged at 15% where a charge to the ATED arises.
Trading in land
Although gains on the disposal of some investment property can be exempt from UK tax, profits arising from a trade of dealing in or developing UK land will be chargeable to UK tax. The UK tax authorities frequently challenge the status of offshore real estate investors where they consider trading activity to be undertaken. For offshore trading companies, UK corporation tax applies to their profits at a rate of 20% (19% from April 2017). Non-resident individuals and trusts are subject to income tax at progressive income tax rates of up to 45%.
Inheritance tax (IHT)
On death, non-UK domiciled individuals are liable to IHT at a rate of 40% on the total value of their UK sited assets in excess of £325,000. IHT exposure can often be reduced by owning property via an offshore company but this can give rise to a charge to the ATED and the 15% rate of SDLT on acquisition in the case of residential property. The IHT advantages of owning property through an offshore company are currently subject to review and may not be available in the future.
How we can help
Cross border planning is complex. When correctly structured and implemented, there can be significant tax savings and cashflow advantages. Problems and higher tax charges can arise where proper advice has not been taken or structures have been incorrectly implemented and operated. It is vital to take detailed tax advice on your plans before entering into a transaction to ensure that all UK tax obligations and charges are fully understood and managed. Continual changes in tax law and practice mean that it is also important that existing structures are reviewed regularly to ensure that they remain tax-efficient and that all new compliance obligations are met.
For help and advice on how to structure and implement cross border real estate activities, please contact a member of our Tax team.