For overseas owners of UK land and property, the tax rules have become more complicated over recent years – and for the most part, less beneficial.
Many of the changes introduced affect not just non-UK residents, but also foreign-domiciled UK residents (known as ‘resident non-doms’, or RNDs). They apply to residential and commercial
property; and to direct and indirect ownership (i.e. property ownership via a company, partnership, trust or other entity).
The resulting tax landscape is complex, with hidden risks for overseas non-resident property developers.
It’s important to understand the new rules, and their implications for your portfolio strategies. And it’s vital that your ownership structures take account of the risks, while being as tax efficient as possible.
Tightening the net
A slew of measures have all but eliminated the tax benefits of indirect foreign ownership of UK residential property.
This is now subject to:
• the maximum rate of Stamp Duty Land Tax (SDLT) at 15%
• a dedicated tax charge, called the Annual Tax on Enveloped Dwellings (ATED)
• new rules to bring it more fully into the UK inheritance tax (IHT) net
In addition, the Finance Act 2019 has widened the scope for foreign indirect ownership of UK land and property to incur capital gains tax (CGT).
Meanwhile, a new tax-avoidance rule specifically targets disposals of foreign entities with at least 75% of their value in UK land and property. It allows to HMRC to counteract any tax advantages derived from such disposals.
Indirect disposals have also lost their protection from economic double taxation, meaning they could potentially be taxed twice under different sets of rules .
On the plus slide, there’s a change in the offing that may be positive for non-resident owners of UK land and property.
From April 2020, income from company-owned property assets will attract corporation tax – which falls to 17% at the same time. This compares favourably to today’s situation: overseas companies currently pay basic-rate income tax on proceeds from UK property, at 20%.
But inevitably, it’s not all good news. The government is consulting on a 1% SDLT surcharge for non-resident property purchases, likely to apply to direct and indirect structures.
And there’s speculation that they’ll go further, closing existing gaps between the tax treatment of foreign-owned residential and commercial property; and between direct and indirect ownership. That could end the eligibility of indirect structures to avoid IHT and SDLT on UK property in certain circumstances.
Faced with an increasingly difficult tax landscape, non-resident property developers must consider two crucial questions – neither of which have simple answers:
1. Should new investments in UK property be made via foreign entities?
Under current rules, there can be tax advantages to purchasing UK commercial property via an overseas company.
But the opposite is the case for residential property, thanks to ATED, the higher SDLT rate, and greater IHT exposure. Unless, that is, the property being purchased is to be redeveloped, or let on commercial terms to a third party with no connection to the owner.
2. Should properties held in foreign corporate entities stay that way?
If acquiring a property for their own use, non-residents should consider collapsing any existing property-owning companies, to avoid ATED and other potential tax liabilities.
Selling a company’s shares (as opposed to the property itself) will attract a much lower SDLT rate than a property sale. But the gains will likely be eroded by the commercial risks and higher transaction costs of selling a company.
The tax rules affecting these decisions are highly complex; and there will be a combination of commercial and personal priorities to weigh up alongside the tax implications. Expert technical advice will be essential when structuring your foreign-owned UK property portfolio.
The Goodman Jones property team can help you find the right strategies in light of the recent changes, and keep your portfolio optimised in an evolving tax landscape.