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UK property investment by non UK resident investors: Part one – Introduction

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.

UK property investment by non UK resident investors – introduction

Once upon a time…

It wasn’t long ago that UK property investment by non UK resident investors was rather straightforward affair.

To summarise, there was, perhaps surprisingly, no Capital Gains Tax (CGT) liability to contend with. Under basic 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 still is) a slight wrinkle in the form of the temporary non-residence rule which provides that someone leaving the UK, disposing of an asset and returning to the UK within 5 years will be subject to CGT on their return to the UK. Where the vendor of the asset was a trust or a Company then other anti-avoidance provisions might apply. This treatment was, and is, atypical of most other jurisdictions. However, this is not to be lazily labelled as a loophole. It is clear that this is and was the draughtsman’s intention (as can be inferred to the changes to these rules in recent times).

There was 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.

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 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. In all cases all of these rules apply to residential property only;
  2. Generally, the new rules only apply to high(er) value residential properties
  3. The exceptions to (2) are:
    • the extension of CGT to non-UK persons, which applies to all values of residential property; and
    • the 3% surcharge for ‘buy to let’ investments which applies to second properties over the princely sum of £40k

For the avoidance of doubt, it is important to note that commercial properties are not within the new rules and traditional structuring for that type of property is largely unaffectedFor now, anyway.

Why have these changes come in to play?

“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.

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, the Colbert quote for me is a brilliant summary of why these changes are being made. 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’.

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

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

Secondly, those who are operating buy-to-let portfolios through Companies are not generally affected by these changes.

Therefore, any ‘hissing’ will be from wealthy persons living (and 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 will be interesting. But it certainly is a political and economic tightrope.

Timeline of changes – property investment by non UK resident

It is worth setting out the timeline of changes that potentially affect property investment by non UK resident persons:

  • 22/3/2012: SDLT special rate of 15% for purchases of ‘high value’ residential interests byC ompanies;
  • 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 (an exclusion for large corporate investment vehicles)

This shows that the first change to the regime was made in March 2012. Since that time, there have been another six direct changes in this area (including the new Land & Buildings Transfer Tax in Scotland). In addition, some of these measures have already been tinkered with.

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

But what do these changes for property investment by non UK resident persons mean? Well, the next episode of this series will look at the SDLT changes which have been introduced.

 

If you or your clients have any queries on UK property investment by non-UK resident investors then please let us know

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