UK Property Tax
Income Tax – Non-Resident Landlord
A property owner, whether an individual, trust or company has to pay income tax on rental income earned from properties in the UK. The basic rate of tax (20%) will usually be deducted by the letting agent at source and paid quarterly to HMRC. Landlords will then have to file a tax return to finalise their tax positions at year end.
A landlord can also apply to HMRC to have the full amount paid to them. HMRC will allow this if the individual is up to date with their affairs and they don’t have any worries about the collection of tax.
UK companies will have the rental profits subjected to corporation tax and offshore companies are currently treated like individuals, but there are plans in place to subject them to UK corporation tax going forward.
Annual Tax on Enveloped Dwellings
If you own the property in a company (either offshore or in the UK) and the purchase price is £500,000 or more, the company will have to comply with the Annual Tax on Enveloped Dwellings (ATED) rules. If the purchase is purely for investment purposes, then reliefs should apply from any tax charges, but there are still compliance returns to deal with and penalties for late returns. If the investor or a close family member wishes to live in the property, a structure outside of a limited company should be sought as there are annual tax charges as illustrated below, as well as 15% Stamp Duty Land Tax (SDLT) to pay on purchase irrespective of purchase price:
|Property Value||Annual Chargeable Amounts (2017-2018 Chargeable Period)|
|£500,001 to £1m||£3,500|
|£1,000,001 to £2m||£7,050|
|£2,000,001 to £5m||£23,550|
|£5,000,001 to £10m||£54,950|
|£10,000,001 to £20m||£110,100|
|£20,000,0001 and over||£220,350|
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is a tax on land transactions in the UK. The return is completed by the solicitor and payment is usually made at the same time. There are lower rates of tax for individuals purchasing their first worldwide residential property as shown below, although the rules are complex and advice should be sought:
|Property Value||SDLT Rate (1st Residential Property)||SDLT Rate|
|Up to £125,000||Zero||3%|
|The next £125,000 (the portion from £125,001 to £250,000)||2%||5%|
|The next £675,000 (the portion from £250,001 to £925,000)||5%||8%|
|The next £575,000 (the portion from £925,001 to £1.5m)||10%||13%|
|The remaining amount (the portion above £1.5m)||12%||15%|
If the property is not residential or is mixed use (such as a building with retail units on the ground floor and apartments above), different rates of SDLT apply. There is no corresponding 3% different rate for non-residential properties.
|Property or Lease Premium or Transfer Value||SDLT Rate|
|Up to £150,000||Zero|
|The next £100,000 (the portion from £150,001 to £250,000)||2%|
|The remaining amount (the portion above £250,000)||5%|
In Scotland, SDLT does not apply, but there is a similar tax called Land and Buildings Transaction Tax (LBTT). Like Scotland, from April 2018, Wales also now has its own regime for stamp taxes on land and property transactions, called Land Transaction Tax (LTT). The rules regarding LTT broadly follow those for SDLT, but the rates of tax and bandings are different recognising the property market in Wales. Further information on these rates can be found on our website.
If the purchase relates to commercial properties, such as an office block or retail units, care needs to be taken to establish the VAT position of the property. Depending on how the seller has dealt with the property, the price may include VAT. VAT advice should always be sought when purchasing commercial property. There is no VAT applied to the sale of the residential property, whether it is new or being passed to a subsequent owner.
Capital Gains Tax
Historically, Capital Gains Tax (CGT) on UK residential property only applied to UK residents. The rule changed in 2015 and there is now a 28% CGT rate irrespective of tax residency. Companies are subject to corporation tax on gains at the rate of corporation tax; currently 19%.
If the company does not qualify for an ATED relief, the rate of corporation tax on the gain could be 28%.
From April 2019, commercial property will also be subject to CGT, irrespective of the residency of the taxpayer. Any gains made before April 2019 will be protected from CGT, as was the case with residential property prior to April 2015. Ideally, companies should obtain a value of their commercial properties as at 1 April 2019.
There has been sweeping changes regarding the way UK residential property is taxed if owned by a non-domiciled individual. Whether owned personally or through an offshore structure, this will now be relevant property for UK tax purposes and tax rates can be as high as 40%.
A review of your circumstances should be undertaken if you own property either personally or in trust, which historically would have been outside the UK Inheritance Tax (IHT) rules.
Commercial properties are currently not treated for IHT purposes in the same way and would not be subject to IHT for non-domiciled individuals.
Residential Property Tax
Where a property is let out, there have been many changes to the way profits for residential property are computed. Amongst the most significant for individual taxpayers is the restriction of mortgage interest relief to 20% for all taxpayers. If the taxpayer only pays tax at 20%, they will get full relief, but if they pay tax at 40% or 45%, then the maximum relief they can get for the interest will be limited to 20%. This is being phased in over 4 years, but will mean a significant increase in taxable profits and tax liability for landlords. If you are an overseas investor, it is only your UK income that will determine the rate of tax payable. Tax relief is available for moveable equipment used to replace the original fit out.
Currently, companies owning residential properties are entitled to the full amount of mortgage interest relief.
If you own commercial properties, you can claim capital allowances on fixtures and fittings within the property. On purchase of the property in the UK, the buyer and seller must enter into a S198 election to agree the value of any fixtures and fittings for capital allowances contained within the building. Specialist advice should be obtained prior to entering into any agreements to make sure you benefit from the value of any assets.
Any additions to the premises may also be allowable for capital allowances and we can advise on these aspects as appropriate.
If you have any questions or if you would like to discuss property tax with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Construction & Real Estate team.