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Non UK resident property investor tax: an introduction (residential property)

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Non UK resident property investor tax: an introduction

Non UK resident property investor tax: background

One does not have to look too far back to find a time when advising a non-UK resident individual on how to structure a UK property investment from a tax perspective was a relatively simple affair.

There was, perhaps surprisingly, no Capital Gains Tax (CGT) liability to contend with. Under basic UK tax principles, and subject to some minor exceptions, if the owner of a UK asset was a non-UK resident person then there simply was no liability to UK CGT.

There was, and remains, a wrinkle in the form of the temporary non-residence rule which provides that someone who leaves the UK, disposes of an asset and then returns to the UK within 5 years will be subject to CGT on their return to the UK.

In addition, where the vendor of the asset was a trust or a Company then other anti-avoidance provisions might apply where there is a certain nexus between the relevant structure and a UK person.

This treatment is unusual when compared to most other jurisdictions. However, this is not to be lazily labelled as a loophole. It is clear that this was the draughtsman’s intention (as can be inferred from the narrow changes to these rules in recent times).

There has been no special wealth tax applied to tax the value of properties held by individuals or ‘structures’.

Inheritance Tax (IHT) applied if one was to die whilst holding UK property and hadn’t had the wherewithal to hold said property via a non-UK structure. However, it was not difficult to plan against this tax even where the property in question was UK situate bricks and mortar.

Stamp Duty Land Tax (SDLT) was levied at the same rates. A person’s status as a UK resident or otherwise or whether you were an individual or some other entity really didn’t matter. The only differentiating factor being whether the property was commercial or residential.

At this time both the rates and how those rates were applied were totally different.

Don’t ask us why.

However, we now live in very different times. Over the last couple of years there have been a number of significant changes to the taxation treatment of non-residents holding certain types of property interests in the UK.

Before looking at the detail, there are some broad themes to be drawn:

  1. Initially, most of these rules only applied to residential property only. However, the Government has seen the effectiveness of attacking bricks and mortar. As such, the thin end of the wedge has got fatter and changes are spreading in to the commercial property world. So much so that we will be providing specific updates for commercial property. How exciting;
  2. Many, though not all, of the new rules only apply to high(er) value residential properties. However, clearly one might be surprised what constitutes a high value property especially when applied to London and the South East!

Non UK resident property investor tax: How did we get here?

“Fair share” of tax

The public message is that the economic ‘recovery’ should be seen to be financed by everyone paying their “fair share”. A phrase which, despite being totally meaningless, has become very popular in UK politics and in the press.

What is a “fair share”? Clearly, the debate in the UK over ‘tax avoidance’ shows that politicians believe that it is certainly set at a level somewhere above that which is specified by the law.

The second rallying call is that the recovery should also be financed by those with the “broadest shoulders”? This is an interesting one as the UK clearly has a progressive tax system and those who earn the most will, by in large, pay the most tax and at a higher effective rate. It is clear that the top earners in the UK contribute by far and away the most tax to the Treasury. However, such reasoning seems largely to be ignored.

There are probably some facts to support this somewhere. However, facts are so passé these days, so I won’t bother.

Hissing geese

Jean-Baptiste Colbert said the following about tax:

“The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” 

Despite the fact he was born nearly four hundred years ago,  Colbert sums up UK tax policy and in particular this set of changes applied to UK property.

First of all, they are targeted at people, generally speaking, who are relatively ‘well off’. They are the predatory and opportunistic ‘fat cats’ and ‘bankers’ and most definitely not ‘hardworking families’.

Apologies for the avalanche of lazy soundbites.

In respect of the SDLT and ATED changes, they were aimed very much at people putting in place structures around properties they will live in. Generally speaking, these structures were constructed by non-residents and / or UK resident non-domiciled individuals who were, potentially, using the structures to mitigate IHT.

[Rather surprisingly, the Government in Finance Act 2017 then introduced additional rules to prevent such structures being used for IHT benefits. However, this also impacted on residential property held for investment purposes.]

UK resident and domiciled persons will not usually have such structures. They will own their dwellings directly.

Therefore, any ‘hissing’ will largely be from wealthy persons living (and perhaps voting?) overseas.

However, the Government hopes that most of these people enjoy spending time in London and, with the potential investment returns, will only see the added taxes as a minor irritant. Whether this turns out to be the case, and certainly there are signs that the property market is far from being as buoyant as it was prior to the avalanche of change, will be interesting.

It certainly is a political and economic tightrope.

Timeline of changes: non UK resident property investor tax

It is worth setting out the timeline of changes:

  • 22/3/2012: SDLT special rate of 15% for purchases of ‘high value’ residential interests byCompanies;
  • 1/4/2013: Annual Tax on Enveloped Dwellings (ATED) introduced. Wealth tax on similar high value homes;
  • 4/12/2014: Announced that ATED will increasingly attach to less valuable properties
  • 4/12/2014: major changes to SDLT rates – high value homes hit much harder by the tax
  • 6/4/2015: Scotland to levy own ‘stamp tax’ called LBTT
  • 6/4/2015: CGT extended to non-UK resident persons for certain residential property
  • 6/4/2016: 3% SDLT surcharge for virtually all buy to let investments
  • 6/4/2017: changes to IHT for Non-Doms such that UK residential property held through an offshore vehicle will be within the UK IHT net.
  • Potential changes from 6/4/19: NRCGT will potentially be extended to the sales of shares in ‘property rich companies’

It is clear from the above that the changes have come thick and fast.

But what do these changes mean? Well, the next episode of this series will look at the SDLT changes which have been introduced. Subsequent chapters will look at the other changes.

 

Non UK resident property investor tax: An introduction is the first article in a collection of articles on non UK resident investor property tax for residential properties. The other articles are:

  1. Non UK resident property investor tax: An introduction;
  2. Non UK resident investor tax: SDLT;
  3. Non UK resident investor tax: 3% Additional rate of SDLT;
  4. Non UK resident investor tax: ATED;
  5. Non UK resident investor tax: Capital Gains Tax;
  6. Non UK resident investor tax: IHT

For changes announced in the Autumn Budget 2017 regarding commercial property and shares in property rich companies then please see here.

 

If you have any queries regarding non UK resident property investor tax then please do not hesitate to get in touch

 

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