Residential Property in the UK A Guide to UK Tax on UK Residential Property

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1 Residential Property in the UK A Guide to UK Tax on UK Residential Property

2 When buying or selling a residential property, you should seek tax advice as early as possible. The main UK taxes to consider are Stamp Duty Land Tax, Income Tax, Capital Gains Tax, Inheritance Tax and the Annual Tax on Enveloped Dwellings. Your tax position may depend on whether or not you are UK resident for tax purposes. It is important that you also consider the tax implications in any other countries appropriate to your particular circumstances.

3 GUIDE TO UK TAX ON UK RESIDENTIAL PROPERTY Stamp Duty Land Tax When you buy a residential property, you have to pay Stamp Duty Land Tax (SDLT). You pay a different rate of SDLT on different parts of the property price within each tax band, as follows: Purchase price of the property Up to 125, ,001 to 250, ,001 to 925, ,001 to 1,500,000 Above 1,500,000 SDLT rate on the part of the property price within each tax band 0% 2% 5% 10% 12% There is a penal 15% rate of SDLT on the acquisition of residential properties for over 500,000 by companies. The 15% rate applies to the full purchase price of the property. There are certain reliefs from the 15% rate so that it only applies to owneroccupiers and does not affect genuine property businesses or properties rented to third parties on commercial terms.

4 GUIDE TO UK TAX ON UK RESIDENTIAL PROPERTY Annual Tax on Enveloped Dwellings There is an annual charge on residential property owned by companies known as the Annual Tax on Enveloped Dwellings (ATED). The ATED applies to properties valued above 1 million on a sliding scale as follows: Purchase price 1 million to 2 million 2 million to 5 million 5 million to 10 million 10 million to 20 million Greater than 20 million Annual Charge for tax year 2015/2016 7,000 23,350 54, , ,200 From 6 April 2016 ATED will also apply to properties worth 500,000 or more which are owned by companies. The ATED does not apply to properties which are rented on a commercial basis to third parties, or are held for certain development purposes. Various other exemptions also apply. Where property was already owned in April 2012 it is the April 2012 value rather than the purchase price which is relevant for the above table. Value Added Tax For both UK resident and non-resident owners, VAT will always need to be considered. As a general rule, VAT does not need to be (indeed cannot be) charged on rents to residential tenants. The downside of this is that a residential landlord cannot recover any of its associated VAT costs. However, if any works are to be carried out at a UK property, the UK zero and reduced rates should be considered carefully as they may reduce the VAT costs incurred (and may allow certain VAT costs to be recovered).

5 UK RESIDENTS A. Income Tax If you personally own a UK property that is rented out, the net rent will be subject to UK Income Tax. This can be at rates of up to 45%. The net rent is the gross rent less various deductible expenses such as management expenses, insurance, repairs and maintenance, the costs of finding new tenants and mortgage interest. The proceeds of sale of a development property will be subject to Income Tax rather than Capital Gains Tax (CGT) where the property was developed or renovated and sold on for a quick profit. B. Capital Gains Tax A sale or gift of your property usually triggers CGT on the gain at a rate of up to 28%. The gain is the difference between what you spent on buying and improving the property and its sale price (or market value in the case of a gift). CGT applies to investment properties and second homes. However, the gain on a gift or sale of a holiday home that was let on a short term basis can in certain circumstances be taxed at the rate of just 10%. C. Inheritance Tax The value of your property will generally be subject to Inheritance Tax (IHT) at 40% on your death although certain reliefs and exemptions may apply. Reliefs include the Nil Rate Band, which effectively exempts the first 325,000. Gifts between spouses or civil partners are also generally exempt. You can sometimes also deduct any mortgage from the value of the property for IHT purposes. If you are non-uk domiciled then you can avoid IHT on the property by owning it through a non-uk company. However, this is generally only suitable for properties that are not occupied by you or your family. That is partly because an owner-occupied residential property owned through a non-uk company is less attractive as a result of the 15% SDLT rate, the ATED and, in some cases, the extension of CGT where it otherwise would not apply. It may also be more cost-effective to protect against IHT by other methods, such as life insurance. If you own the property personally and it is your main residence, any gain on its sale is usually exempt from CGT. Where you have multiple homes, you may be able to choose which is to be treated as your main residence. Although you can generally only have one main residence, in some limited circumstances the exemption can apply to multiple properties.

6 NON-UK RESIDENTS A. Income Tax If you personally own a UK property which is rented out, the net rent will be subject to UK Income Tax. This can be at rates of up to 45%. However, if the property is owned through an offshore company, tax on the net rental income will be restricted to the basic rate (currently 20%). The net rent is the gross rent less various deductible expenses such as management expenses, insurance, repairs and maintenance, the costs of finding new tenants and mortgage interest. The proceeds of sale of a development property will be subject to Income Tax rather than CGT where the property was developed or renovated and sold on for a quick profit. B. Capital Gains Tax Since 6 April 2015, non-uk tax residents (including offshore companies, offshore partnerships and offshore trustees) will be liable to pay CGT on the disposal of UK residential property on any gains arising after April The rates are 20% for companies not within the ATED-related CGT charge, 18% or 28% for individuals and partners and 28% for trustees. Companies within the ATED-related CGT charge and paying ATED will be taxed at 28% on all gains made from April 2013 onwards. No main residence exemption is available for companies owning property. C. Inheritance Tax The value of your property will generally be subject to IHT at 40% on your death although certain reliefs and exemptions may apply. Reliefs include the Nil Rate Band, which effectively exempts the first 325,000. Gifts between spouses or civil partners are also generally exempt. You can sometimes also deduct any mortgage from the value of the property for IHT purposes. If you are non-uk domiciled then you can avoid IHT on the property by owning it through a non-uk company. However, this is generally only suitable for properties that are not occupied by you or your family. That is partly because an owner-occupied residential property owned through a non-uk company is less attractive as a result of the 15% SDLT rate, the ATED and, in some cases, the extension of CGT where it would otherwise not apply. It may also be more cost-effective to protect against IHT by other methods, such as life insurance. The UK Government has also recently announced plans to abolish the IHT advantages for non-uk domiciled individuals holding property through non-uk companies from April If you own the property personally, you may be able to claim exemption from CGT if you (or your spouse or civil partner) spend at least 90 midnights in your UK property (or in any of your UK properties) and elect for it to be treated as your main residence for CGT purposes.

7 WHAT TO DO NEXT We would be pleased to advise on the most tax efficient structure for your residential property purchase or to review your existing property-holding structure. For further information, please contact: Disclaimer: This is a very basic summary of a complex area of law and taxation. It is not to be taken as legal advice. Before acting or omitting to act in relation to your UK tax position, you should always take specialist tax advice. Mishcon de Reya LLP 2015 (3) Andrew Goldstone Partner, Head of Tax T E Jonathan Legg Partner, Real Estate Tax T E Kassim Meghjee Partner, Tax Group T E

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