Investing in UK Property as a non-resident: key tax considerations – Part 2

Option 2: Owning via company

If you are a non-UK resident and considering acquiring UK property through a company, it's important to understand the tax implications. Holding property in a company can offer benefits in some situations, but it also introduces additional complexity and compliance obligations. This guide outlines the key tax considerations and compliance issues when UK property is owned through a corporate structure.

Advantages of owning a property through a company

• The rental income in the company is subject to tax at corporation rates of up to 25% compared to up to 45%. However, as shown below extraction of funds will therefore mean that additional tax is due in most cases upon extraction (see Section B).
• Companies can be used to house investments as part of family planning and using the company constitution to set the rights of shareholders which may span across generations. This type of planning is very flexible but the rules that must be met are also very rigid.  We cannot stress enough the importance of seeking appropriate legal advice.
• Gifting of shares can be simpler compared to gifting of properties as part of succession and estate planning, as the formal conveyancing procedures are avoided. However, various registers will need to be updated as part of this process to reflect new ownership.
• If a mortgage is used to finance the property acquisition, then Mortgage interest is fully deductible.

Disadvantages of owning a company

• The additional administrative burden (see section B).
• Most likely face double taxation on extraction (see section C), therefore the rates applicable to individuals who own property may even result in a lower tax burden overall – depending on the rental profit level.
• The rental profits are not the funds of the shareholders and so usage of the funds will be restricted unless the funds are formally extracted (see section D).
• The mortgage interest could be more expensive, with higher fees and interest rates applying.

It is also important to note that the tax and legal rules can change over time, for better or worse.

1. Acquisition of the property by the company & Stamp Duty Land Tax

There are two options that will result in a property being within a company structure:

1. The company purchases the property

A company purchases the property outright.  To be able to, the company will need to be financed by the shareholders. The shareholders will it by way of equity, debt or a mixture of the two.  It can then proceed to acquire the property.

Equity is the formal process of investing in a company.  The amounts subscribed will form the base cost of their shareholding.   Where shares are subscribed for on incorporation, then there is no Stamp Duty payable by the shareholder.

A loan can be made to the company.  It is recommended that the loan is repayable on demand by shareholder.  Repayment of the loan can be made without tax consequences, as discussed in Section D.

2. The property is purchased by the individual and then sold to the company

The acquisition of the property will be as described in the first part of this blog post.  SDLT will be payable by the individual on purchase.  On sale, the capital appreciation will be subject to Capital Gains Tax based on the increase between the acquisition cost and associated expenses against the market value of the property at sale - on the basis that the seller is connected with the company.

There may be an immediate IHT charge on the transfer to the company, which is covered by the IHT sub-section of section C.

1. Administrative burden

Below is a list of various compliance matters where a UK company holds UK property, to illustrate the added compliance burden:

• Requirement to file documents with the UK Company Registrar, including annual accounts as well as other filings including an annual confirmation statement.
• Running of a company Payroll and preparing monthly reporting to HMRC – if the director is to be remunerated by way of a salary.
• Filing a UK Corporation Tax return on an annual basis, to determine how much corporation tax to be payable to HMRC.
• Preparation of an ATED (Annual Tax on Enveloped Dwellings) tax return or annual return for exemption.
• Preparation of tax returns for directors/shareholders, so that any income tax and CGT is paid to HMRC.

Should a non-UK company own UK property, there will likely be compliance within that the jurisdiction of incorporation and separate advice should be sought from an appropriate adviser in that jurisdiction.

However, I have included below additional aspects that will be required from a UK perspective.

• Preparation of an ATED (Annual Tax on Enveloped Dwellings) tax return or annual return for exemption.
• Preparation of tax returns for directors/shareholders, so that any income tax and CGT due is paid to HMRC.
• Registration with the Register for Overseas Entities.

1. Taxes relating to owning properties through a company

 Corporation Tax

A company is liable to Corporation Tax on its profits that arise in an accounting period.  Profits less than £50,000 are taxed at 19%, profits above £250,000 are taxed at 25% and profits that fall in between the two threshold are taxed at a rate that is proportional depending where the profits lie in between these two thresholds.

When calculating profits, various allowable expenses can be deducted including any director’s salary and mortgage interest (see the section below regarding distributions from the company).

Corporation tax returns are filed annually.

Annual Tax on Enveloped Dwellings (ATED)

Where a residential property is owned by a company, but not for a qualifying purpose, then an annual charge is paid on that property if the value is over £500,000.  The charge depends on the value of the property and an annual return is required to be submitted.

A qualifying purpose includes renting out a property to an unconnected third party on commercial terms or is bought with the aim of developing the property or land, but would not include if a property that is owned by a company is made available to a person connected with a director.

Where a qualifying purpose is in point, a relief return needs to be filed.

Generally the returns (which includes a claim for relief) are due 30 April after the start of the ATED year which runs from 1 April to 31 March.  Where a property is purchased during the ATED year, the returns need to be filed within 30 days of acquisition.

Stamp Duty Land Tax

Stamp Duty Land Tax will still need to be paid on a commercial or residential property as an individual would, based on the rates shown below.

• Residential: Standard progressive rates apply up to 12%, however potential surcharges could increase this to up to 19%:
  +2% for non-UK residents
  +5% if you're not replacing a main residence
• Commercial: SDLT is charged at progressive rates of up to 5% as shown below:

If a residential property costing more than £500,000 is purchased by a company, a higher flat SDLT rate of 17% may apply.  Reliefs are available in certain circumstances, including where the property is acquired as part of a genuine property rental business or property development business.

Inheritance Tax

Generally, individuals that do not meet the definition of ‘long term resident’ (LTR), will only have UK assets that are subject to IHT.  An LTR is someone who has been resident in the UK for more than 10 out of the last 20 tax years under the UK’s Statutory Residence Tests.  Any assets that are non-UK assets are known as ‘excluded property’, but there is an exception for non-UK resident companies that hold UK residential property.

UK property held within a non-UK resident company or a foreign partnership is not excluded property and will be subject to IHT if the property is held on death or is gifted to a trust and some companies.

A transfer to a limited company would be liable to a lifetime IHT charge of 20% if the transferor’s ownership of the shares does not match the ownership in the property prior to the transfer.  However, if there is a charge to IHT and CGT, then relief can be sought for CGT.  The effect of the relief that the company will acquire the property at the value in which the original purchaser acquired the property at.

Treaty relief

1. Profit extraction

There are various methods that are available to extract rental profits from a company, I will provide an outlined of the main methods that can be used.

1. Director Salary

A director can receive a salary from the company in return for their services.  The salary will be a deductible expense against corporation tax, which means that it will be deducted from pre-tax profits.  Salaries will be subject to taxes and social security deductions dependent on the individual's circumstances.

2. Company Dividend

An individual could instead take a dividend, which is given in return of their original investment (being the equity within the company as described above).  Dividends are chargeable to income tax on the individual at slightly lower rates, on the basis that dividends are applied to post-tax profits.  The dividend rates are applied against at progressive rates of 8.75%/33.75%/39.35%.

3. Repayment of a Director’s Loan

If a director loans funds to a company, this can be drawn down tax free as it is a return on their loan.  However it is important that the “director loan account” does not become overdrawn, as there may be tax consequences for the company.

4. Winding up the company

Any of the aforementioned methods can be used as required, however at the end of its life the company can be formally wound up.  Distributions will hopefully be subject to Capital Gains Tax, though if, for example, the property business will continue in some other form then there is anti-avoidance legislation that result in distributions being subject to income tax.

Each method has different tax implications and suitability depending on your circumstances and goals - there are also other options which have not been covered. It's essential to seek professional tax and legal advice to choose the most efficient route and that all necessary compliance obligations are met.

1. Disposal of the company

 Selling the company

Selling the company can be done by way of selling the shares will be a CGT disposal.  There will be a CGT charge as the shares derives its value from UK land and property, assuming that it meets the definitions of being property rich.

The selling of the company will a disposal based on the amount received compared to the amount that has been formally invested in the business by way of equity, with expenses relating to the sale being allowable.  If the purchaser is connected to the seller, e.g a family member, business partner, etc, then the proceeds will be equal to the market value – rather than the proceeds received.

However, it may be the case that buyers may prefer to acquire the company outside of the structure.  When acquiring a company that already exists, their will inherit the history of the company.  However, indemnities and warranties will form part of the purchase process to protect the acquirer.

2. Gifting the company

As previously mentioned, the company shares can be gifted as part of succession planning.  A gift to a connected party will result in a Market Value Capital Gain, which is tricky as the transferor has not received funds.

Also, as there is a gift between individuals, the transaction is within the scope of IHT.  The gift is a Potentially Exempt Transfer, chargeable to IHT art 40% if the gift-giver dies within 7 years of the transfer.  Whilst there is tapering relief, this reduces the tax payable and so may not assist in reducing the amount of tax due on death.

Assuming the company is not a trading company but an investment company, then there is no way to reduce the CGT tax.

A small silver lining is that gifting shares means that Stamp Duty of 0.5% will not apply to the purchaser.

3. The company sells a property

If a buyer will acquire the property from the company to own personally, then any gains on disposal would be subject to Corporation Tax rates up to 25% rather than personal CGT rates which are up to 24%.  The net funds received will be taxable on extraction, in the same way as with the net profits after tax.

The purchaser would in this case pay SDLT at the applicable rates.

Conclusion

Whether properties should be owned directly or indirectly through a company, will depend on the overall circumstances.  There is no single best solution.  Owning properties indirectly via a company does come with a lot more complexities compared to owning directly and therefore costs.  It does allow for a lot more flexibility for estate planning, which may counterbalance the costs associated.  It is most likely better for using as an investment vehicle with substantial assets, but please reach out to us and we can find a solution that is tailored to your circumstances.