Some answers to frequently asked questions on tax for non-UK structures for UK property.
What are the tax implications of holding an investment property in an overseas company?
The UK currently encourages inward investment into UK property by providing a tax exemption for investment gains realised by an overseas investor on the sale of UK commercial property. However, this exemption is expected to be withdrawn for gains arising from April 2019 from when a 19% rate is likely to apply (falling to 17% in April 2020). Properties currently exempt from tax are expected to be rebased to their market value in April 2019 for the purpose of calculating future taxable gains.
Most gains on residential property are taxed at a rate of either 20% or 28%. The 28% rate will generally apply for property valued at over £500,000 and which is not let as part of a property rental business. Where the 28% rate applies, an annual tax on enveloped dwellings (ATED) will also apply. The ATED annual charge ranges from £3,500 for properties worth between £500,000 and £1m to £220,350 for those worth £20m or more. Net rental income (after finance costs and other deductions) is currently subject to tax in the hands of a non-UK resident company at 20% but this is expected to be 17% from April 2020.
What is the position where the company is trading rather than investing?
Profits from property trading (ie buying to re-sell or to develop and sell) are not taxed as capital gains but, instead, represent trading income subject to UK corporation tax at 19% (17% from April 2020).
What about stamp duty land tax?
Stamp duty land tax (SDLT) is currently levied on purchases of property in England, Wales and Northern Ireland and applies to acquisitions by both resident and non-UK resident companies. Under current rules, transfers of property between members of a group will not attract SDLT as long as the transfer is for commercial reasons.
The original purchase of a commercial property will trigger SDLT at a progressive rate of 2% on consideration between £150,001 and £250,000 and at 5% for consideration in excess of £250,000.
For residential property, a much wider range of tax bands applies with progressive rates of between 0% and a top rate of 12% (for properties valued at over £1.5m). A 3% surcharge also applies where the purchaser is a company or an individual already owning another residential property. Each rate applies to the part of the proceeds within that rate band so multiple rates can apply to one transaction).
A special 15% rate applies to purchases of residential properties valued at over £500,000 by bodies corporate (largely companies), collective investment schemes and partnerships whose members include one or more investors within any of the above categories. An exemption from the 15% rate is available where the property is acquired for the purposes of a rental business or a property development trade.
An SDLT return will generally need to be filed for a property acquisition.
A separate land and buildings transactions tax (LBTT) applies for property purchases in Scotland. Rates of LBTT on commercial property range from 0% to 4.5%. The top rate is charged where the property value exceeds £350,000. Rates of LBTT for residential property range from 0% to 12% which, as with properties in England, are subject to a 3% surcharge for companies and individuals purchasing additional property. The top rate applies to properties valued at over £750,000. As with SDLT, each rate only applies to the part of the proceeds within that rate band.
Wales will also have a separate Land and Buildings Tax (LBT) from April 2018 with its own rates.
How are intercompany transfers treated?
Where companies, whether they are UK resident or non-UK resident, are in a group relationship (which for tax purposes usually means 75% common ownership under a holding company), no SDLT should arise on transfers of property between group companies provided that the transfer does not involve a tax avoidance motive.
Where both companies are UK tax resident, transfers of investment properties between group companies take place at no gain/no loss for tax purposes. In this way, any gain is only taxable when the property is sold outside the group. This will also be the case for the transfer of residential property between non-UK resident companies where those companies are both subject to a pooling election.
Where a UK resident company sells a property to a non-UK resident company, a taxable gain will arise even where that company is within the same group (although there is some debate whether, in certain circumstances, this contravenes EU law). A capital loss can also arise although, because of the connection, its use would be restricted. Conversely, where a non-UK resident company transfers a property to a fellow group member that is UK resident, the disposal is normally treated as taking place at market value.
Transfers of properties held as trading stock would generally be regarded as taking place at market value, even where they are between group companies. Accordingly, tax can arise on such transfers, although an election for an alternative value to apply for tax purposes can be made in some circumstances.
What is the tax impact if the ultimate owners are in the UK?
Generally, a UK tax resident can be taxed on both income and gains arising to offshore entities under various anti-avoidance rules. Historically, in some cases, an individual who was tax resident but not domiciled in the UK may have had a lower exposure to UK tax where properties are owned through a non-UK structure. However, specific advice should be taken in such situations as the rules for non-UK domiciliaries changed significantly from 6 April 2017 and, therefore, such structures may no longer be effective for tax purposes.
Management – does it matter who makes decisions?
A company incorporated overseas also has to be managed and controlled outside the UK to be non-UK resident for tax purposes. Normally, a company is run by its directors. An overseas company will usually have a board of directors consisting of a majority of individuals who live and work in that jurisdiction. HMRC can be expected to check that such directors make company decisions outside the UK.
What UK tax returns are required?
A non-UK resident company must submit a corporation tax return annually if it has UK property held as trading stock and a UK permanent establishment. Where the company owns UK property as trading stock and does not have a UK permanent establishment, a corporation tax return would be required in the year of disposal.
Companies with investment property generating rental income should register under the non-resident landlord scheme to ensure that they can receive rent without 20% income tax being withheld. The company would then submit an income tax return annually. Such companies are likely to have to register for corporation tax from April 2020.
For residential investment property, a non-UK resident capital gains tax return will be required following a sale. If the value of any individual property held exceeds the ATED thresholds, an ATED return or ATED exemption return must also be filed.
Does an overseas structure get tax relief for finance costs?
Finance costs incurred on a property investment or trading business should normally be tax deductible provided that the finance has been raised on commercial arm’s-length terms. The tax treatment will generally follow the accounting treatment although, where annual finance costs exceed £2m, a restriction to the interest deduction applies from April 2020.
Does withholding tax apply to interest paid by a non-UK resident company?
A non-UK resident company paying interest which is UK source can be required to withhold income tax at 20% from each payment and account for this to HMRC. There are some exceptions: for example, where the loan is quoted on a recognised stock exchange; where a deep discounted security is issued or where the term of the debt is less than 12 months. These rules are under review and any steps taken would need to be implemented following an assessment of the impact of a possible change in the law.
What happens if you bring an overseas structure onshore?
Generally, where the management and control of a company is moved to the UK there is a change of tax residence. In some cases, this may be overridden by the terms of the double tax treaty that the UK may have with the other jurisdiction.
A move of tax residence to the UK will not generally alter the tax base cost of an investment asset (but may affect the tax cost of trading stock). If the change of residence happens before April 2019, there would be no rebasing of commercial property to market value in April 2019. For residential property, there may, in some cases, be a deemed disposal and reacquisition of the property at market value immediately prior to the relocation such that the market value will become the tax base cost of the property.
Where the tax base cost is unaltered, any future UK tax charge will be based on the historic cost of the property even though some or all of the growth up to the date of the change of residence might not have been taxable had the gain been crystallised before acquiring UK residence status. The tax position in the overseas territory should also be considered.
For help and advice on how to structure and implement cross border real estate activities, please contact Marios Gregori or Steven Dowers.