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 for non-UK residents
Gains on the disposal of non-residential UK real estate are currently tax free for non-UK resident investors. Gains accruing from April 2019 are expected to be taxed at rates of 18%/28% for non-UK resident individuals and trusts and at 19% (17% from April 2020) for non-UK resident companies. Gains arising on residential real estate are already taxed at 18%/28% for individuals and trusts and at 20%/28% (19% expected from April 2019 and 17% from April 2020) for ‘narrowly controlled’ companies. Gains of ‘widely controlled’ companies accruing from April 2019 are expected to be taxed at 19% (17% from April 2020).
UK tax on income
Net rental income after deductions (see below) is chargeable to UK tax and calculated on an accruals basis. Non-resident individuals and trusts are subject to progressive income tax rates of up to 45%. Offshore companies are currently subject to tax at 20% (17% expected from April 2020).
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 £220,350 (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 generally attracts tax relief. Restrictions apply where the rate charged is not at ‘arm’s length’ and on commercial terms.
For the tax year to 5 April 2018, income tax payers letting residential property receive a deduction for 75% of their interest expense and receive a tax credit at a rate of 20% for the balance. The amount permitted as an expense will reduce to 50%, then 25% and zero by 2020/21 when a tax credit at 20% will be given on all such interest. Interest relating to commercial property is fully deductible.
From April 2020, offshore companies are expected to be subject to a complex restriction for interest relief where the total interest incurred by the corporate group exceeds £2m.
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 some residential properties.
Determining the qualifying amount on an acquisition or refurbishment project can be complex and amounts claimed 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. A deduction is available for the cost of replacing loose items of furniture in residential properties but can be restricted where the replacement items represent an improvement on what is being replaced.
In general, rental profits and losses across properties of a single entity are offset. Where an overall loss arises in any year, this is carried forward for future relief, but such relief may be spread over several years.
Tax administration: non-resident landlord scheme
Where a taxpayer registers for the non-resident landlord scheme, an annual income 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, eg the tax return for the tax year to 5 April 2017 must be submitted by 31 January 2018.
Income tax liabilities are settled in three instalments payable on 31 January during the relevant tax year and on 31 July and 31 January following the tax year.
Interest and penalties are generally payable in the event of late payment of tax or late submission of returns.
In the case of unregistered taxpayers, the UK agent or the tenant will be obliged to withhold 20% of the rent payment and pay this to the tax authorities.
Non-resident companies letting UK property are likely to be required to register for corporation tax from April 2020. The filing date for the corporation tax return is likely to be 12 months from the end of the company’s financial year end date with tax falling due 9 months after the year end date.
Value added tax (VAT)
Generally, rents from residential property are exempt from UK 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 currently chargeable on the acquisition of property in England, Wales and Northern Ireland. Land and Buildings Transaction Tax (LBTT) is charged in Scotland at different rates. Wales will move to its own Land and Buildings Tax (LBT) from April 2018 onwards – again at different rates.
Most commercial property is charged to SDLT 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 an additional 3% - eg 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 to SDLT at 15% where a charge to the ATED arises.
Trading in land
Although gains on the disposal of some investment property are exempt from UK tax until April 2019, 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 19%. 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. Since 6 April 2017, UK sited assets for this purpose include shares in non-UK resident companies holding UK property.
How we can help
Cross border planning is complex. When correctly structured and implemented, there can be tax savings and/or 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 your Marios Gregori or Steven Dowers.