UK Residential Property Tax Changes

A number of Gibraltar residents own UK residential property. This may be a former home, a holiday home or purely an investment (popular, particularly at a time when interest rates are relatively low). It may be owned by a resident individual, company, trust or pension scheme. Sometimes several properties are owned using more than one type of structure.

 

Because Gibraltar does not tax foreign rental profits and neither does it levy Capital Gains Tax (CGT), there are no reporting obligations in Gibraltar. The same is not true of the UK however:

  • The UK taxes UK rental profits even if the owner of the property is not UK resident.
  • From 6 April 2015 it also levies CGT on the disposal of residential properties.

We often meet with owners who are not aware of these obligations or are unsure how they apply to them.
The UK is clearly extending its grip on the taxation of UK residential property. Keeping up to date with the rapid pace of legislative change in the UK poses considerable challenges. Now is therefore a good time to review current structuring, to address those changes which have already occurred and plan ahead for those which lie not far away on the horizon.

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UK Income Tax


Rent

If the property is rented out, the rental income less allowable expenses is liable to UK Income Tax. This remains the case even in the hands of a non-UK resident (Gibraltar resident) because the income is UK source.

Deduction of Tax at Source

In the UK, there is a legal requirement for 20% tax to be withheld (by either the tenant or the rental agent) on rental payments made to non-UK residents, along with the tenant or agent filing Returns with HMRC. However, it is possible and advisable for a non-resident owner of UK property to register as a Non Resident Landlord (NRL) with HMRC. This is a registration process which, if HMRC agree to it, enables the non-resident owner to receive the rent in full, achieving an important cash-flow advantage. This however does not mean that the rental income is exempt from UK tax (a common misconception). The liability to UK tax on the rental profits remains in a NRLs hands, and an annual Self Assessment UK Tax Return (“Return”) must be filed by them to HMRC.

The Return must be filed by 31 January following the UK tax year end (online filing deadline). There is however a ‘glitch’ because the non-residence pages of the Return cannot currently be completed on HMRC’s free online software. Accordingly non-residents either have to submit their Return to HMRC in paper (rather than online) by the earlier paper deadline of 31 October following the tax year end, or submit their Return online using appropriate commercial tax software (e.g. by purchasing the software or engaging a UK tax adviser). Late filing and/or payment incurs penalties. It’s worth noting that the UK’s March 2015 Budget did announce that there are plans to replace the Return with a “digital tax account” by 2020 but the present filing system is likely to continue for another 5 years.
The current Income Tax rates that apply are:

  • For non-resident individuals – 20%, 40% or 45% depending on the level of taxable income (currently with a standard personal allowance of £10,600 for 2015/16, whether and to what extent non-residents continue to have entitlement to UK personal allowances in the future is under review).
  • For non-resident trustees (for most discretionary/accumulation trusts and most pension schemes) – 20% on the first £1,000 of taxable income, then 45% on all other (non-dividend) UK income.
  • For non-resident companies (not already within ATED, see below) – 20%.

UK Capital Gains Tax


In a buoyant property market there is hopefully capital growth. From 6 April 2015 disposals of an interest in UK residential property by non-UK resident owners will be liable to UK Capital Gains Tax (CGT) if not already liable to ATED related CGT (see below). This is a significant change to the previous regime which, generally, allowed non-UK residents to realise gains on UK residential property free of UK tax.
The charge applies to gains from April 2015 and owners have a choice how to calculate this, either the standard approach, which is by using an April 2015 market value as their base cost (so some owners have already been obtaining valuations, although HMRC have said that an April 2015 valuation can be obtained at the point the property is sold), or there is the option to elect to use a time apportionment method (which time apportions the total gain to the post April 2015 period).

The gain must be reported to HMRC on the Return (see above filing dates).

The current CGT rates that apply are:

  • For non-resident individuals – 18% or 28% depending on the level of taxable income and gains (with an annual exemption also being available, £11,100 for 2015/16).
  • For non-resident trustees – 28%, (with half the annual exemption that would normally be available to individuals).
  • For non-resident companies (not already within ATED) – 20%.

There are exemptions, which include non-UK pension schemes and we may see the use of pension schemes to hold residential property becoming more prominent.

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UK Inheritance Tax (IHT)


Non-Domiciled Individuals

IHT is charged on transfers of value by individuals. It is most often paid on estates on death but can also be due on gifts made during lifetime and on certain transfers made in to and out of trusts. There are various exemptions and reliefs.
Generally the scope of IHT is determined by where the individual is domiciled, which very broadly means where their permanent home is. Historically UK domiciled individuals are liable to IHT on their worldwide estate with non-UK domiciled individuals generally only liable on UK sited assets. Therefore if a non-domiciled individual owns shares in a Gibraltar company which owns UK property, the assets in his hands (i.e. the shares) are non-UK sited and therefore outside the scope of IHT.
However on 8th July 2015, the UK Government announced that from 6 April 2017 UK residential property held via offshore structures will become subject to IHT. This change will apply to all residential property, whether occupied or let and whatever value. Therefore prior to April 2017, trustees and company managers may wish to consider the potential impact of this change and explore whether restructuring would be appropriate.

Increase in IHT Limit to £1 million

The much vaunted proposal to increase the IHT limit to £1 million announced on 8 July 2015 may make good headlines, but it is essential to read the ‘small print’ if the true economic value of this relief is to be reliably assessed.
Currently, on death, IHT is charged at 40% on estates over the tax free allowance of £325,000 per person. Since October 2007, you can transfer any unused amount of this allowance from a late spouse/civil partner to the surviving spouse/civil partner for use when they die. This can increase the tax free allowance of the surviving partner from £325,000 to as much as £650,000. Furthermore, from April 2017, each individual will be offered a family home allowance (starting at £100,000 in April 2017 and rising to £175,000 by April 2020) so they can pass their home on to their children/grandchildren tax-free after their death. The family home allowance will be added to the existing £325,000, meaning the total tax free allowance for a surviving spouse/civil partner will be up to £1 million in 2020/21. The allowance will be gradually withdrawn for estates worth more than £2 million.

Annual Tax on Enveloped Dwellings (ATED)

In April 2013 ATED was first applied to high value UK residential property owned by a company (this includes non-UK resident companies). Currently this applies to properties valued at more than £1 million (pre April 2015, the threshold was £2 million, post April 2016 it will be £500,000). The reduction in this ATED threshold coupled with an accelerating property market could soon mean that the risk of an ATED charge has to be considered in relation to all UK residential property held in enveloped structures.
The ATED charge is based on property value and ranges from £7,000 to £218,200 per annum (2015/16 rates). There are a number of reliefs from ATED, for example if the property is let to a third party on a commercial basis or if it is part of a property trading business.
There is also a 28% ATED related CGT charge on capital gains.
Corporate owners may benefit from considering whether to take the property out of the company, which would require a review of their specific circumstances.

Stamp Duty Land Tax (SDLT)

SDLT applies to UK residents and non-residents alike. It applies on transfer of UK property and is paid by the purchaser. For residential property transactions completing on or after 4 December 2014, a slicing system applies, based on property value with a tax rate of up to 12%. Generally this change to the system should enable residential purchasers to reduce the cost of acquiring property where the purchase price is less than £1 million.
Please note however that the SDLT rate for residential property acquired by a company is 15% if the cost of the property is more than £500,000.

Residency elsewhere

Finally, persons who are resident in other jurisdictions may well find that UK property income, gains and transfers are also taxed in their country of residence. For example, in Spain, the UK/Spain Double Taxation Agreement (DTA) allows both Spain and the UK the right to tax a UK property gain, so a Spanish and UK CGT liability could result on sale, in which case a foreign tax credit should be available in Spain for any UK tax paid (post April 2015).
Furthermore, for tax on the rental profits, even if an individual is resident in another country that has a comprehensive DTA with the UK, its terms will always protect the right of the UK to tax UK property income.
However anomalies exist between jurisdictions and some entities which are recognised in the UK tax system may not be recognised overseas, or may be taxed more severely than in the UK. This means that owners should ensure that the advice that they receive is ‘joined up’ and considers the optimal position in all tax jurisdictions. With increasing enforcement powers and penalty provisions being introduced internationally, the need for comprehensive tax advice will inevitably grow exponentially.

 

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