Contributed by Dorian Beresford, Chief Executive Officer, Strawberry Star
Until now, individuals investing in property in the UK have been able to minimize their tax exposure by using a corporate vehicle to buy properties. However, the UK government has announced measures to close this loophole.
Overall, it is not as clear cut as saying an individual should do one thing or another to minimize their tax exposure as there are multiple considerations affecting either route of investment (as an individual or a corporation), such as the usage of the property – whether the property is being used by a family member or if it is being commercially let.
But here are some of the key components that should be taken into consideration.
- Buying Stamp Duty Land Tax
- Income Tax on rental income
- Annual tax on Enveloped Dwellings (ATED)
- Selling Capital Gains Tax
- Inheritance Tax
Stamp duty land tax (SDLT)
When one buys a residential property in the UK, the purchaser will have to pay SDLT. With effect from 4 December 2014, the UK has reduced the rates of Stamp Duty Land Tax (SDLT) payable on the purchase of UK residential property. Flat rates previously applied depending on the bands into which the purchase price fell, but from 4 December the tax will be progressive. In general this will reduce the SDLT payable on properties costing less than nearly £1 million, but will increase the amount due on purchases above that level. As an example, a £400,000 property purchase will now attract SDLT at an effective rate of 2.5% (£10,000) rather than the previous 3% (£12,000).
Where contracts to buy have been exchanged, but not completed, before 4 December 2014, buyers are able to choose whether to pay SDLT on the basis of the previous, or the new, rules.
For corporate buyers, however, the rate is fixed at 15% (unless the company can claim exemption for instance where it is letting the property at a commercial rate).
Income tax is payable by UK property owners who are renting out their properties. This is calculated on the profit component of the rental income and is based on a sliding scale from 20%-40%. This can be minimised by maximising tax deductions such as maintenance, the interest component of a mortgage, and agents’ fees for example. A furnished property can deliver a further 10% reduction. Income of non-UK companies is taxed at 20%.
Annual Tax on Enveloped Dwellings (ATED)
ATED is a relatively new measure effective from April 2013 and is ONLY payable by companies, partnerships or collective investment funds. It is an annual charge based on the value of the property and is calculated on a sliding scale. However, more residential properties will be subject to ATED from April 2015 because the threshold will be lowered from GBP 2 million to GBP 1 million, and then further to GBP 500,000 from April 2016 (meanwhile at the same time, the charges are set to increase). There is an exemption however, if the property is commercially let.
Capital gains tax (CGT)
Since 2013, a company has had to pay CGT for the gains realized on the sale of UK residential property, if the sale proceeds are more than GBP 2 million. The tax rate is 28%. The threshold will be lowered from April 2015 to include proceeds on properties valued at over GBP 1 million and the further lowered to GBP 500,000 from April 2016.
Previously, non-resident individuals benefited from no capital gains tax, however plans were announced earlier this year to begin charging CGT on gains made by non-resident individuals, companies not already liable to pay CGT, Trusts and partnerships. The detail as to how HM Revenue & Customs intend this to operate was released on 28 November 2014.
The main features are;
1) Gains on a disposal of property in the future will becalculated by reference to its value on 5 April 2015.
2) Owners will have the option to use a time-calculated basis to exclude gains accrued up to 5 April 2015 where this is to their advantage. UHY Hacker Young believes it will be advisable in many cases for an independent valuation of property values to be obtained on, or close to, 5 April 2015, to provide a degree of certainty as to the value to be used in calculating Capital Gains on a sale in the future. Some property developers are already taking steps to arrange this, particularly where "off plan" properties which are not yet constructed need to be valued.
3) Capital Gains Tax on individuals will be charged at 18% or 28% depending on whether their gains and income taxable in the UK are within the higher tax bands.
4) New restrictions will make it more difficult for Non-UK resident individuals to claim that a UK home qualifies for exemption as their main private residence. No exemption will be given for years in which the person was not resident for tax purposes in the UK, or in which they spent less than 90 nights in the UK. In practice UHY Hacker Young believes it would be unusual for a non-UK resident to have been in a position to make a claim, so this is unlikely to have a major impact.
5) Non-UK Companies which are not already within the charge to CGT (broadly, those owning high value property which is not commercially let) will be liable to Capital Gains tax at 20%.
6) Although further clarification is to follow, non-UK residents will be required to report sales of UK property to the UK tax authorities within 30 days of sale. Persons not previously within the UK tax system will be required to make a payment of CGT at that time, whereas those who are already within UK Self-Assessment of tax will be required to declare their gain and pay tax in the usual way, normally by 31 January following the end of the UK tax year in which the sale took place.
This applies to assets that are situated in the UK and affects non-UK domiciled individuals. Beyond the current GBP 325,000 allowance, additional value is taxed at 40%. There are again strategies that can be employed – for example registering a property jointly between husband and wife, therefore gaining double the allowance.