Buying, owning and selling UK residential property by non-UK residents can lead to complex UK tax considerations, which we explore in this article.

As international travel opens up, it is expected that there will be renewed interest in the UK property market from non-UK resident buyers. In this series of articles we will look at some of the legal and tax issues that non-residents should be aware of when buying property in England. This first article focuses on the tax issues when buying real estate for personal and family use. The following articles will discuss taxation in relation to rental properties and non-tax considerations, including estate planning.

The key takeaway from this article is that UK taxation relating to UK residential property can be complex and advice should be taken before beginning the buying process. In the majority of cases, due to tax implications, where property is purchased for personal occupation by the owner and his family, personal ownership is likely to be the preferred option, rather than ownership through a trust and/or corporate structure. There may be exceptions to this where other factors, such as succession planning or asset protection, are the primary drivers, and the position needs to be considered as part of the round.

purchase tax

The main tax to consider when buying a property in England is Stamp Duty Land Tax (SDLT). SDLT is charged at progressive rates, with lower tax rates applied to the first part of the purchase price and progressively higher rates on different parts of the purchase price.

For non-UK residents, there are two key provisions which can increase rates (across all bands):

  • Additional real estate surcharge of 3%; and
  • 2% non-resident SDLT surcharge.

The additional property add-on applies if the buyer owns residential property anywhere else in the world (not just existing property in England). If the new purchase is to replace an individual’s principal residence that is sold at the same time as the purchase (or within 3 years of the new purchase), the additional rate will not apply: but for non-residents British nationals who intend to remain non-resident, this exception will rarely apply. As most non-UK residents own another property elsewhere in the world, the 3% surcharge almost always applies.

The 2% non-resident surcharge is payable when a non-resident UK purchases residential property in England. The residency test for SDLT purposes is different from the standard UK tax residency test. For individuals, an individual is a resident of the UK (and therefore the 3% surcharge will not apply) if they have been present in the UK for at least 183 days in a continuous period of 365 days which:

  • begins on the day 364 days before the effective date of the paid operation; and
  • ends on the day 365 days after the effective date of the paid operation.

The table below sets out the standard SDLT rates on residential properties and shows the effect on the rates of the additional property and non-resident surcharge that applies.

Ownership or lease premium or transfer value

Standard SDLT Pricing

SDLT rate when additional property and non-resident supplement apply

Up to £125,000

Zero

5%

The next £125,000 (the £125,001 to £250,000 part)

2%

7%

The next £675,000 (the £250,001 to £925,000 part)

5%

ten%

The next £575,000 (the £925,001 to £1.5 million part)

ten%

15%

The remaining amount (the part above £1.5m)

12%

17%

As the table above shows, SDLT liabilities can become significant. For example, for a non-UK resident who owns another overseas property, buying property in England for £3 million will result in an SDLT liability of £423,750. A £10m property would result in an SDLT liability of £1,613,750.

The tax must be paid within 14 days of completing the purchase and how the tax will be funded should be considered upfront.

If the property is purchased by a non-UK resident company and the purchase price is over £500,000, a flat rate of 17% will apply to the total purchase price. Again, specific rules apply for the purposes of the SDLT to determine whether a company is not resident in the UK.

Tax during ownership

The residence tax will be due throughout the duration of the property. This tax is paid to the local authority in which the property is located and the level of tax varies depending on the local authority and the value of the property.

If the property is corporately owned, is worth more than £500,000 and is used by the company shareholder (or related family members), the Annual Wrapped Accommodation Tax (ATED) will apply. This is an annual fee, payable in April. The rates for the 2022/23 tax year are shown below. The impact of ATED, together with the inheritance tax regime discussed below, means that as a general rule, where property is to be used personally by the owner, direct ownership in personal name, rather only through a corporation or trust structure, is likely to be the most tax-efficient option. ATED does not apply where property is owned directly by an individual or directly by the trustees of a trust.

Taxable value of the property

ATED charge for tax year 2022 to 2023

£500,001 to £1,000,000

£3,800

£1,000,001 to £2,000,000

£7,700

£2,000,001 to £5,000,000

£26,050

£5,000,001 to £10,000,000

£60,900

£10,000,001 to £20,000,000

£122,250

£20,000,001 and above

£244,750

Sales tax

If a gain is realized when a non-resident of the UK sells residential property in the UK, that gain will be subject to non-resident capital gains tax (if the property was privately owned or directly to the trustees of a trust) or corporation tax (if the property was owned by a corporation). The current maximum rate of capital gains tax for individuals on the disposal of residential real estate is 28%. The current corporate tax rate is 19%, but it is expected to increase to 25% from April 2023.

Where the owner is not a UK resident, the principal private residence relief is unlikely to apply to exempt the gain from tax.

If the property was held before 2015, a change in basis may apply so that only the gain accrued since that date may be chargeable.

If the property is owned by a corporation and the shares of the corporation are sold, the shareholder may be subject to non-resident capital gains tax on the increase in value of the shares. If the business was owned before 2019, a change in basis may apply.

Tax on death

If the owner of UK property dies while she owned it, UK inheritance tax may be payable. This regardless of the place of residence or domicile of the owner. There is a zero rate band for inheritance tax of £325,000 and above the tax rate is 40%. There are exemptions and reliefs that may apply, the main one being where the property passes to the spouse or civil partner of the deceased. As we will see in a later article, it is essential to make a will to ensure that if the owner wants the property to pass to his spouse on his death, he does so. If there is no will, UK intestate rules will apply and depending on the personal circumstances of the deceased, the spouse may not inherit the entire property.

As of 2017, owning residential property in the UK through a non-UK incorporated company no longer offers protection against inheritance tax. To the extent that the value of shares in a non-UK company derives from UK residential property, the shares will be subject to inheritance tax on the death of the shareholder.

If the property and/or company is held within a trust structure, the trust will be subject to inheritance tax at a maximum rate of 6% every 10 years on the value of UK property held directly or on the value of stocks that derive their value from UK residential property. In addition, if the settlor of the trust is a beneficiary, there may be estate tax payable for his or her estate, at a rate of 40%, on the value of the trust’s property from real estate. British residential, under the “donation with rules of reservation of services (“GROB”).

Both the 6% ten-year charges and the GROB rules may apply, leading to two separate inheritance tax regimes applying to the same trust. For this reason, owning UK residential property through a trust structure is often not appropriate where the settlor wishes to be able to use the property.

For many non-UK residents, now that a company structure no longer offers any inheritance tax protection, ownership through a company structure is not the preferred option. Ownership through a non-UK company will result in higher SDLT rates on purchase, plus ATED being payable on an annual basis and these additional costs, combined with no inheritance tax protection , mean that personal ownership is often preferred.

There are various ways to mitigate inheritance tax, including:

  1. As stated above, ensure the owner has a will covering the UK assets and consider using the spouse’s inheritance tax exemption where applicable.
  2. Using debt to buy property. The rules regarding the deductibility of debt for estate tax purposes can be complex. When the debt was incurred is critical: the debt must be used to purchase, maintain or improve the property, so if the debt is incurred after the event and secured by the property but the borrowed funds are used outside the UK debt may not be deductible. Ideally, the debt should be secured by the property. Debts of family members or related trust structures can be problematic because benefiting from the debt can lead to inheritance tax issues for the creditor. Commercial borrowing from a third party secured by the property up front is the preferred option, but advice should be taken on this.
  3. Co-ownership can be considered between different family members. If a family member dies, inheritance tax should only apply to the deceased’s portion of the property. There may be technical points to consider here, particularly where one family member is financing the shares of other family members and again advice should be sought.
  4. Recourse to life insurance to insure against the tax risk of inheritance.

In summary, the tax situation on the purchase of residential property in the UK by a non-UK resident can be complex and advice should be sought before starting the process, to ensure that the ownership structure correct is put in place from the outset.

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