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 continues to encourage 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. Most gains on residential property are taxed at a rate of either 20% or 28%. The 28% rate will generally apply in the case of property valued at over £500,000 and which is not held for the purposes 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 £218,200 for those worth £20m or more. Net rental income (after finance costs and other deductions) is subject to tax in the hands of a non-UK resident company at 20%.
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 treated as capital gains but, instead, represent trading income subject to UK corporation tax at 20%.
What about stamp duty land tax?
Stamp duty land tax (SDLT) is levied on purchases of UK property 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, there is a much wider range of tax bands with headline progressive rates between 0% and 12% and these are subject to a 3% surcharge where the purchaser is a company or an individual already owning another residential property. The top rate applies to properties valued at over £1.5m (each rate only 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. However, 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 on a property acquisition within 30 days of completion, although the filing date can be earlier in some circumstances.
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% and (as for 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.
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. In some cases, an individual who is tax resident but not domiciled in the UK may have a lower exposure to UK tax where properties are owned through a non-UK structure but specific advice should be taken in such circumstances as the rules for non-UK domiciliaries may change from 6 April 2017.
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 both UK property held as trading stock and a UK permanent establishment. 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. 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.
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 for groups with finance costs exceeding £2m a restriction in the deduction available may apply from April 2017.
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 limited to a period of less than 12 months. This is an area that is 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 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 impact on the tax cost of trading stock). In the case of residential property, there may, in some circumstances, be a deemed disposal and reacquisition of the property at market value for tax purposes 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. Therefore, consideration should be given to crystallising capital gains before a change in residency, especially in the case of commercial property. 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 your usual BDO adviser or Philip Spencer.