United Kingdom: Non-UK residents with residential property in the UK

The way non-UK residents hold property there is changing.
Here’s some initial guidance on what can be done in response to that change.

The preferred option for non-resident property purchasers used to be to hold the property through an offshore company in which they owned all the shares. This offered both Stamp Duty and Stamp Duty Land Tax (‘SDLT’) savings based on the fact that the purchase and sale of such properties can be achieved via the sale of shares in the non-resident company. Shares in the offshore company are also treated as foreign assets and are therefore outside the scope of UK Inheritance Tax (‘IHT’). Personally owned UK property is subject to IHT on the death of its owner, even if that owner is non-resident and non-domiciled. The rate is 40%, above a nil-rate band of £325,000. Legislation has been introduced to discourage buyers from buying and holding residential property using ‘non-natural persons’ to reduce taxes. The use of a corporate structure may still make sense, but that will depend on the value of the property being purchased, how the purchase is funded, and the domicile of the purchaser. The main changes are to SDLT, an extension of the scope of Capital Gains Tax (‘CGT’) and an Annual Tax on Enveloped Dwellings (‘ATED’).

SDLT: The 2012 Finance Act introduced a new 7% SDLT rate on the purchase of UK residential properties with a value in excess of £2 million. Such properties purchased through companies are subject to a 15% SDLT rate. From 20 March 2014, the 15% rate was extended to properties in excess of £500,000.

CGT: From 6 April 2013, CGT is chargeable on the disposal of UK residential property in excess of £2 million and held through a company. The charge applies to companies registered in the UK and abroad, replacing corporation tax on such gains. CGT will be charged at 28% on the difference between the sale price on disposal and the value of the property at 6 April 2013. Tapering relief will apply to gains on property which is worth just over the £2 million threshold.
From April 2015, non-resident individuals disposing of UK residential property will be subject to UK CGT on the gains. This extends the scope of UK CGT to all non-residents – not just the owners of high-value property held in a company. A disposal of shares in a company owning high-value property is not subject to the CGT charge. However, such transactions can have serious drawbacks from a purchaser’s perspective, as the latent CGT liability can be deferred but not avoided. A sensible purchaser would expect a discount to account for the risk of a future change in legislation, which could trigger a CGT charge, even without a disposal of the property.

ATED: This is a tax payable by companies on dwellings worth more than £2 million at 1 April 2012, or at the purchase date, if later. It came into effect on 1 April 2013, and is payable each year. The amount of the charge is worked out using a banding system based on the value of the property. Properties held by companies are required to be valued every 5 years. The next valuation date is April 2017. ATED only needs to be paid when the property is owned by:

• A company or other corporate body (a company that owns property in its capacity as a trustee of a settlement is not included in ATED. If a company owns property as a trustee of a bare trust, it is the beneficial owner who may be within ATED)
• A collective investment vehicle (unit trust or Open Ended Investment Company)
• A partnership which includes one, or more, of the above.

Relief is available for properties let to third parties on a commercial basis and property development businesses.

Options for future purchasers

Purchase personally, using cash, take out life insurance
This is the simplest option. The insurance policy is designed to pay out an amount to cover the UK IHT liability in the event of death. Married couples and civil partners can use a joint life second death policy, to cover the UK IHT liability on the non-exempt second spouse’s death. Life insurance cover can be very cheap for the young to middle-aged.

Purchase personally, using bank debt secured on the property
This is another simple option. The capital value of a mortgage used to fund the initial purchase will be deductible for IHT, but note that if you borrow post-acquisition against a UK property, the loan will not be deductible for IHT. IHT exposure on the mortgaged property would be limited to the growth in value over the amount of the debt.

Purchase by an offshore company
For lower value properties, this can still be a viable option, although the running costs need to be taken into consideration. ATED and CGT are not yet charged on properties worth less than £2 million, but the regime will be extended to properties valued at £1 million from 1 April 2015, and to properties valued at £500,000 from 1 April 2016. The charges will be £7,000 per year and £3,500 respectively. The extension of 15% SDLT to properties worth over £500,000 may
also be prohibitive.

Options for current corporate owners

Leave things as they are
Offshore company ownership currently allows protection from UK IHT charges, and enables a future sale of the shares free of SDLT and CGT.

Remove the property from the company into personal ownership
Alternatively, the property could be removed from the company into personal ownership. No annual ATED charges would then be payable, but CGT would still be payable on a disposal of the property by a non-resident owner after 6 April 2015. The property would then fall within the scope of IHT. Depending on the age and health of the owner, a 40% IHT charge on death (subject to the spouse exemption and IHT nil-rate band) is unlikely to compare favourably with an annual ATED charge at less than 1%, but it could be covered by life insurance as explained above. Finally, it is vital that property owners have suitable wills in place. This should ensure that the property passes as he wishes, and can also offer tax savings.