UK RESIDENTIAL PROPERTY TAX GUIDE FOR OVERSEAS LANDLORDS

Transcription

1 UK RESIDENTIAL PROPERTY TAX GUIDE FOR OVERSEAS LANDLORDS

2 WAYS TO HOLD UK RESIDENTIAL PROPERTY Benham & Reeves Residential Lettings is London s leading independent residential letting and management company offering a comprehensive service to clients. We assist overseas landlords with all residential propertyrelated HM Revenue & Customs matters including guidance on the best way to buy a property, to preparation of annual accounts, completion of tax returns and advice on any payments required. We are not accountants and have prepared this guide for general guidance based on current legislation. It does not constitute professional advice, nor cover commercial property nor the tax implications in jurisdictions outside the UK. We recommend clients obtain specific professional advice. Holding residential property in the UK can be done in a number of different ways which carry different tax implications. The most common and straightforward ways are: Personal Name: A non-resident individual owns the property in their own personal name or jointly with other individuals. Offshore Company: A non-resident individual owns the shares in an offshore company (incorporated outside of the UK) which in turn owns the property. UK Company: A non-resident individual owns the shares in a UK company (incorporated in the UK) which in turn owns the property. This guide will not deal with UK company ownership at all. There are a number of variations on the above including the use of onshore and offshore trusts which can significantly complicate matters and are outside the scope of this guide.

3 TAXES APPLICABLE TO UK PROPERTY There are a number of taxes which can apply at different stages of ownership which we go through below: STAMP DUTY LAND TAX (SDLT) This is a transaction tax payable by the buyer on the purchase of property or an acquisition of an interest in property. The amount is charged on the amount paid for the property or for the interest in the property acquired. SDLT is charged on a sliding scale above 125,000. The current rates for SDLT are as follows: Property Value Thresholds SDLT rate Under 125,000 From 0 to 125,000 0% The next 125,000 from 125, ,000 2% The next 675,000 from 250, ,000 5% The next 575,000 from 925,001 1,500,000 10% The remaining amount Above 1,500,000 12% Company Purchase Above 500,000 for non-natural 15% persons where the property is not intended to be rented An additional 3% will be payable from 1 April 2016 where, on completion, the purchaser owns more than one residential property worldwide, including on buy to let residential properties and second homes. This does not apply if contracts had been exchanged prior to 25 November 2015, even if completion is after 1 April 2016 (which would typically apply to properties purchased off plan ). Company Purchase: If the Property is being purchased as an investment to be rented then the 15% SDLT is not applicable. The exemption from the 15% rate is not automatic and must be claimed on the SDLT return submitted at the time of purchase. Company Sale: Where a property is purchased by a Company, the shares of the Company can then be sold as opposed to selling the actual property and as such there is no further SDLT due. Property Transfer: SDLT is not payable if a property is acquired under the terms of a Will. This applies even if the beneficiary takes on an outstanding mortgage on the property on the date the person died, provided that no other consideration is given is gifted to an individual during a person s lifetime, as long as there is no outstanding mortgage on the property at the time of the gift. However, if the person who receives the gift takes over some or all of an existing mortgage, then SDLT will be payable on the loan amount if the value of the loan is over the SDLT threshold. Anything relating to a gift needs careful consideration and professional advice should be sought prior to doing anything.

4 INCOME TAX Non-resident (Individuals and Companies): Non-residents are subject to UK income tax on the rental income after deducting allowable expenses. The rate of tax is based on the level of rental profit and any other UK income. Based on the current tax year 2015/16: Individuals have the following income tax bands applied: Band Income up to 31,785 Income 31, ,000 Income above 150,001 Rate 20% Basic Rate 40% Higher Rate 45% Additional Rate In the tax year 2016/17 the basic rate tax band will increase from 31,785 to 32,000. Non-resident companies are subject to a flat rate of 20% irrespective of the level of income after deducting allowable expenses. Allowable Expenses include the following: n Loan interest if the property purchased is financed wholly or partly with loan finance. In future landlords will only be able to claim relief for interest at the basic rate. This change is being phased in slowly starting in the tax year ended 5 April 2018 and will not be fully in place until the year ended 5 April For the year ended 5 April 2018 only 25% of interest will be restricted to the basic rate, for 5 April 2019, a 50% restriction will apply and for 5 April 2020 a 75% restriction. Following on from that all interest will be restricted to the basic rate. n Agents fees in letting and managing the property. n Repair work to the property. n Gas and electricity safety certificates. n Service charges & ground rents. n Landlord insurance. n Accountancy charges and certain other legal and professional fees. The following would not be allowable expenses: n Capital expenditure on the enhancement of a property, such as extensions. n Costs of replacing existing items with significantly superior versions. n Certain legal fees and property acquisition costs as these are both allowable against CGT. Wear & Tear: Previously landlords of furnished properties were entitled to a wear and tear allowance of 10% of the rent received as furnishings are not an allowance expense. However from April 2016 landlords will be able to claim the full cost of replacement furnishings as incurred (but not the initial cost of furnishing) instead of the wear and tear allowance. This relief extends to all movable furniture, televisions, fridges and freezers, carpets and flooring, curtains, linen and kitchen utensils. Anything that is a fixture to the building and is replaced would be treated as a repair and is also deductible. Fixtures can be considered as anything that would not be removed by an owner on the sale of the property and includes baths, toilets, boilers and kitchen units. If an item is replaced with an improved item then the cost of the element of the replacement item that reflects the improvement would not be allowable. The example given by HMRC is that if a washing machine that would cost 400 is replaced by a washer dryer for 600 then only 400 can be claimed as an expense under the replacement furniture relief.

5 If the deductible expenses in any given year are more than the rental income, this will generate a loss which can be carried forward and set off against future rental income. Allowances: Non-resident individuals who reside in the European Economic Area are entitled to a personal allowance, commonwealth citizens however are no longer automatically entitled to a personal allowance. The availability of such allowances will depend on the double tax agreement between the UK and the other relevant country. Certain other individuals may also be entitled to the UK personal allowance but this would need to be looked at on a case by case basis. The personal allowance for 2015/16 is 10,600. Individuals entitled to a personal allowance are not subject to UK income tax until their profit exceeds this amount. The personal allowance will increase to 11,000 in 2016/17. If a non-resident individual or company has other income in the UK, the tax position may be affected. The tax position in the country of residence will depend on the provisions of the double tax treaty with the UK and also personal circumstances. Non-Resident Landlord Scheme: The UK operates a system whereby the person paying the rent to an overseas landlord (generally the managing agent) must deduct 20% from the net rent remitted as a payment on account of the tax liability and pay this direct to HMRC. A landlord is deemed overseas if their usual place of abode is outside the UK, generally where they are resident outside of the UK for more than 6 months in a year. This could mean an overpayment of tax as any expenses paid directly by the landlord would not have been deducted. To reclaim the overpayment, the landlord would need to declare the overpayment in their UK tax return. Non-resident individuals and companies can apply to HMRC to receive the rent gross, without deducting any tax at source, so long as their UK tax affairs are up to date. If a non-resident already has approval but is changing to a different agent, then the new agent must be linked to the record or the agent will have to make deductions at source. If approval is granted then the landlord is obliged to submit selfassessment tax returns and pay any tax owing in line with the specified timeframes. HMRC can withdraw previously given approval at a later stage if circumstances change. It is important to note that obtaining approval does not mean the landlord is exempt from having to pay UK income tax. It only means the agent or person paying the rent can remit rent that is collected without making a tax deduction.

6 CAPITAL GAINS TAX (CGT) Non-resident Individuals: From April 2015 non-residents are liable for CGT on any gains made from the sale of UK residential property, although any gain up to 6 April 2015 will remain exempt from this tax. The first 11,100 (for the 2015/2016 tax year) of any gain is exempt from any tax. The balance of any gain depends on the vendor s net UK income in the year of disposal and will be taxed at either 18% or 28%. To calculate the tax payable, the seller first works out the net gain since April 2015 (or purchase if later) after deduction of allowable costs and the annual exemption. The seller then works out the total net income in the year of disposal and deducts this amount from the threshold for the basic rate of income tax ( 31,785 for 2015/16 and 32,000 for 2016/17). That amount is chargeable at 18% and the balance is charged at 28%. Where the property is jointly owned the gain is shared between each owner when calculating the tax payable and each is entitled to the annual exemption. Private resident relief (PRR) permits any gain to be exempt from CGT if the property occupied was the seller s main residence. There are strict provisions which need to be claimed before PRR can be applied. For example PRR can only be claimed in any year of ownership if the seller had resided in the property for at least 90 days in that year. Non-Resident Companies: From April 2015 CGT also applies on the sale of any UK residential property by overseas companies. The current CGT rate for companies is 20% of the gain where the property is rented. There is no annual exemption for companies. Properties Owned Prior to 6 April 2015: Before 6 April 2015, all gains were exempt from CGT. HMRC allow the following methods for calculation of the gain from April 2015: carry out a valuation to set the baseline figure as at 6 April 2015 for assessment of any gain thereafter and subsequent CGT liability; or use a time apportioning method where the total gain from the original purchase is calculated and then divided by the length of ownership and apportion the relevant gain to the period of ownership post April 2015; or use the original purchase price to calculate the gain. CGT is payable for properties purchased off-plan before April 2015 but not completing until after that date. A desktop valuation to set the value as at April 2015 would be recommended to calculate the post April 2015 gain. Properties which are not rented out: UK and non-resident companies owning high value UK residential property that are NOT rented out are subject to CGT (since April 2013) known as ATED Related Capital Gains at the rate of 28%. Further information on Annual Tax on Enveloped Dwellings (ATED) is detailed below. High Value means where the sale price exceeds 500,000 from April Notification to HMRC: Non-residents must notify HMRC within 30 days of the sale, but the actual payment of the tax varies: if the non-resident does not already have a relationship with HMRC, a return must be submitted and any tax must be paid at the time of submission if the non-resident does have a prior relationship with HMRC and has a self-assessment record then the gain should be reported in their tax return and the gain paid in line with self-assessment timeframes. It has been proposed that in future all CGT will be payable within 30 days of the sale completion.

7 INHERITANCE TAX (IHT) A UK property held by a non-resident individual is liable for IHT. If the property is held at the date of death, the value (after deducting any allowable borrowings on the property) above the nil rate band (currently 325,000) is subject to IHT at a rate of 40%. There are 2 ways in which a UK property can be held by more than 1 person, which must be decided at the time of purchase: n Joint tenants equal percentage ownership of the property between each individual. On the death of one party, the property automatically transfers to the other owner. n Tenants in common the percentage ownership does not have to be equal. On the death of one party, the share of the asset forms part of the individual s estate and will be dealt with in accordance with the individual s will. There is no IHT if the asset is transferred to a spouse on death (unless the transfer is from a UK domiciled individual to a non UK domiciled spouse, in which case only 325,000 of the net value of the estate is free of inheritance tax and the remainder is subject to IHT). If, on the first death, the property has passed to the surviving spouse then on the second death, both nil rate bands (a total of 650,000) are available against the UK property, however the transfer of the nil rate band is not automatic and has to be claimed. The surviving spouse will then have double the allowance free of inheritance tax. The Finance Bill 2013 stipulated that any loan deduction from the estate value must be actually repaid to the creditor unless there is a commercial reason not to. This is to avoid artificially created debts designed to reduce the estate value. Property owners are therefore unable to increase the loan figure from the amount taken out at purchase to reduce the value of the estate, except where the additional loan is used to purchase property. If the property is gifted by a non-resident individual during their lifetime into a Trust (UK or non UK) then a 20% lifetime rate of IHT applies on the net value above the nil rate band. If the individual was to subsequently die within 7 years, additional IHT applies at an effective rate of 20%. If an individual gifts a property to a company owned by them, there is likely to be no IHT charge as the value of their estate will not have diminished. If a non-resident individual makes an outright gift of a property to another individual, this would be a potentially exempt transfer and if the donor survived 7 years then the property falls out of the estate for IHT purposes. If death occurs within 7 years of making the gift then IHT is payable at a tapered rate as follows: n Death in less than 3 years of making the gift 100% of full tax rate payable. n Death between 3 and 4 years of making the gift 80% of full tax rate payable. n Death between 4 and 5 years of making the gift 60% of full tax rate payable. n Death between 5 and 6 years of making the gift 40% of full tax rate payable. n Death between 6 and 7 years of making the gift 20% of full tax rate payable. It is important to note that the individual will be liable for CGT on the gift based on the gain since 6 April 2015 to the market value at the date of the gift. Properties held by offshore companies are not currently liable for IHT however it has been proposed that they will be in the future.

8 VALUE ADDED TAX (VAT) The letting of residential property in the UK is an exempt activity for VAT purposes and therefore the landlord is not able to register for VAT and is not able to charge VAT on the rent. This means that there is no scope to recover UK VAT incurred on expenses such as agent s commission. ANNUAL TAX ON ENVELOPED DWELLINGS (ATED) ATED was introduced in April 2013 and applies to the ownership of residential property by companies and certain non-natural persons. It is not payable where the property is purchased for investment and is rented out. Depending on the value of the property, an annual charge is payable. The charges for the year beginning 1 April 2015 are as follows: Property Value 1m to 2m 7,000 Annual charge 2m to 5m 23,350 5m to 10m 54,540 10m to 20m 109,050 20m+ 218,200 The bands are meant to increase each year to account for inflation in line with the consumer price index. Currently it applies to properties with a value above 1m as at 1 April 2012 (or at acquisition if later). That threshold will reduce to 500,000 as of April 2016 and the proposed rates for properties valued between 500,000 and 1,000,000 is 3,500 per annum. The value of the Property is the value as at 1 April 2012 or the value at acquisition if it was purchased at a later date. The Government expects valuations to be self assessed by those it is applicable to and submitted to HMRC as part of an annual return. If the valuation is carried out by a suitably qualified surveyor it will protect the taxpayer from possible penalties should a self-assessed valuation be challenged. Property owners can submit proposed valuations to HMRC for checking which will be reviewed in conjunction with the Valuation Office agency. The valuations will apply for 5 years. The ATED return must specify details of the property including the beneficial owners and be submitted along with payment by 30 April each year. Returns are required even if the property is exempt and there is no tax to pay. In respect of properties which comprise a number of self-contained dwellings, for example a block of apartments, the high-value threshold would generally apply to each individual apartment and not to the property as a whole. It should be noted that if a property is de-enveloped, i.e. transferred into individual ownership from a non-resident company, the individual will need to consider any future inheritance tax exposure.

9 ILLUSTRATIVE EXAMPLES Below are some examples comparing the various taxes at every step of a property s ownership, comparing if owned in an individual s name as opposed to in an offshore company. These examples are for illustrative purposes only. FURTHER ADVICE This guide has been prepared in conjunction with our tax advisers who can provide advice on all aspects of UK taxation related to the ownership of UK property. On a cautionary note, we would advise that there are promoters of tax avoidance schemes which are designed to mitigate taxes including SDLT and IHT. However, many of these schemes are seen as aggressive by HMRC and are coming under close scrutiny especially since the introduction of a general anti-abuse rule which is intended at stopping such schemes. DISCLAIMER This guide, which includes the examples in the appendix, has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should neither act or refrain from acting, upon the information contained in this guide without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this guide. To the fullest extent permitted by law, the company, its directors, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this document or for any decision based on it. OUR TAX & VALUATION SERVICES We offer a highly personal and very comprehensive service in assisting clients with any residential property-related tax matter which is overseen by our Finance Director, Vidhur Mehra, a member of the Institute of Chartered Accountants of England & Wales (qualified from BDO Stoy Hayward). 1) Non-resident Landlord Scheme Assistance in getting a landlord set up with the Scheme to avoid tax being deducted at source. 2) Self Assessment Income Tax Return Service We will calculate a landlord s net income/profit, taking into account all income and deducting all allowable expenses. We will then submit your annual self-assessment tax return to HMRC and declare any tax that needs to be paid. Please note our service is limited to preparing returns based on rental income from properties that we manage in the UK. However we are happy to discuss your individual requirements and advise you on what you need to do. 3) ATED Returns We can submit the annual ATED return. 4) Non-resident Capital Gains Tax Returns We can submit the non-resident CGT return on sale of a property. 5) Valuations We arrange valuations for both CGT and ATED purposes. Our fees are fairly priced as this is an add-on service. Fees are fixed for each year and are classified as a tax-allowable expense.

10 APPENDIX ILLUSTRATIVE EXAMPLES The following examples illustrate the differences between individual and corporate ownership, and are based on current legislation and proposals. You should not act NOR refrain from acting, upon the information contained in these examples without obtaining specific professional advice. In all examples, some assumptions have been made: n Property purchased pre April 2015 (and therefore the additional 3% for buy to let properties and second homes does not apply) and sale/ death post April n Stamp Duty on purchase is at rates at the time of publication. n Rental yield in the examples where the property is rented, we are using a constant yield on the purchase price and therefore the rent increases in line with the value. The range in income reflects the expected increase over the period of ownership. n No personal allowance available (if there was this would reduce the income tax payable for properties held in personal names). n No wear and tear allowance and assumed no replacement furnishings. n CGT there is no income in the year of sale and no expenses or reliefs available.

11 EXAMPLE 1 Single Property under 1m which is rented. Owners / Beneficiaries Single person Personal Names Offshore Company Value on purchase 500, ,000 Value at April , ,000 Value at sale / death 700, ,000 Mortgage 300, ,000 Stamp Duty on purchase 15,000 15,000 Income on Income on Income on Income on original price sale value original price sale value Estimated gross annual rental income 25,000 35,000 25,000 35,000 (assume 5% yield) Estimated net rental income 6,300 13,860 6,300 13,860 after all expenses Annual income tax 1,260 2,772 1,260 2,772 IHT on death 30,000 0 Estate value ie 400,000 Less nil rate band 325,000 at 40% Conclusions/ Notes n Income Tax there is no difference between holding in an individual or a company structure. If the individual received a personal allowance then holding in a personal name would be far more beneficial from an income tax perspective. n CGT better in a company structure. n IHT currently not applicable for a company n Important considerations the running costs of the company are not included it is more difficult to raise finance for an offshore company. n Advantages for offshore company there is no SDLT to a potential purchaser if the shares of the company are sold rather than the property income tax payable is fixed at 20%, whereas the income tax for individuals can increase to 45% if there were to be a high level of income. CGT on sale or gift 21,713 20,000

12 EXAMPLE 2 Single Property under 1m which is rented. Owners / Beneficiaries Married Couple Personal Names Offshore Company Value on purchase 500, ,000 Value at April , ,000 Value at sale / death 700, ,000 Mortgage 300, ,000 Stamp Duty on purchase 15,000 15,000 Income on Income on Income on Income on original price sale value original price sale value Estimated gross annual rental income 25,000 35,000 25,000 35,000 (assume 5% yield) Estimated net rental income 6,300 13,860 6,300 13,860 after all expenses Annual income tax 1,260 2,772 1,260 2,772 IHT on death 0 0 Estate value ie 400,000 Less nil rate band 650,000 at 40% CGT on sale or gift 15,427 20,000 Conclusions/ Notes n Income there is no difference between holding in an individual or a company structure. If the individual received a personal allowance then holding in a personal name would be far more beneficial from an income tax perspective. n CGT lower in personal names. n IHT There is no IHT in either scenario although as the value rises IHT may become payable where the property is held in personal names. There is no inheritance tax on a gift to a spouse even if the donor does not survive 7 years from the date of the gift. Married couples can transfer their nil rate band and therefore will not have to pay any inheritance tax on the first 650,000 of the value of their estate. It can be seen therefore that there is not always an inheritance liability to consider. n Important considerations the running costs of the company are not included and it is more difficult to raise finance in an offshore vehicle. n Advantages for offshore company there is no SDLT to a potential purchaser if the shares of the company are sold rather than the property income tax payable is fixed at 20%, whereas the income tax for individuals can increase to 45% if there were to be a high level of income.

13 EXAMPLE 3 Single Property over 1m which is rented. Owners / Beneficiaries Married Couple Personal Names Offshore Company Value on purchase 2,500,000 2,500,000 Value at April ,750,000 2,750,000 Value at sale / death 3,250,000 3,250,000 Mortgage 1,250,000 1,250,000 Stamp Duty on purchase 213, ,750 Income on Income on Income on Income on original price sale value original price sale value Estimated gross annual rental income 125, , , ,500 (assume 5% yield) Estimated net rental income 43,900 72,250 43,900 72,250 after all expenses Annual income tax 8,780 16,185 8,780 14,450 IHT on death 540,000 0 Estate value 2m Less nil rate band 650,000, at 40% CGT on sale or gift 127, ,000 Conclusions/ Notes n Income At higher portfolio values income tax payable by a company becomes comparatively less as individuals start to pay higher rates of tax but income tax for a company is at a flat rate of 20%. n CGT lower in company structure. n IHT the property is of a higher value than Examples 1 & 2 so there is a substantial IHT liability and therefore a company structure is currently much better. n The individuals may wish to consider gifting the property to a relative. If they survive at least 3 years it will reduce the IHT payable and after 7 years there will be no inheritance tax. SDLT would apply on the mortgage amount (i.e. 68,750). Therefore gifting the property and surviving 7 years would result in an IHT saving of 540,000 which outweighs the SDLT payable of 68,750 and CGT payable on the gift of 127,400. n Distinct advantages to holding the property in a corporate vehicle: the income tax charge is at a flat rate of 20% whereas for the individual the rate will be up 45% the company structure has a lower CGT as the rate is a flat 20%, however for individuals the rate goes up to 28%. n The major advantage here is the UK IHT saving however the investor should consider any IHT consequences on the disposal of shares in their own jurisdiction which is beyond the scope of this document.

14 EXAMPLE 4 Portfolio of 5 properties which are rented. Owners / Beneficiaries Married Couple Personal Names Offshore Company Value on purchase 5,000,000 5,000,000 Value at April ,000,000 6,000,000 Value at sale / death 7,000,000 7,000,000 Mortgage 3,000,000 3,000,000 Stamp Duty on purchase 513, ,750 Income on Income on Income on Income on original price sale value original price sale value Estimated gross annual rental income 250, , , ,000 (assume 5% yield) Conclusions/ Notes n All areas are better off in a company structure as the portfolio is high value so there are substantial income tax, CGT and IHT savings within the company structure. n On this type of portfolio the advantages of holding in a corporate vehicle are: income tax is at a flat rate of 20% as opposed to up to 45% for individuals CGT is at a flat rate of 20% as opposed to 28% for individuals. n The major benefit here is the UK IHT saving however the investor should consider any IHT consequences on the disposal of the company shares in their own jurisdiction which is beyond the scope of this document. Estimated net rental income 68, ,000 68, ,000 after all expenses Annual income tax 14,650 51,250 13,680 28,800 IHT on death 1,340,000 0 Estate value 4,000,000 Less nil rate band 650k, at 40% CGT on sale or gift 267, ,000

15 EXAMPLE 5 Single Property over 1m which is NOT rented. Owners / Beneficiaries Married Couple Personal Names Offshore Company Value on purchase 2,500,000 2,500,000 Value at April ,600,000 2,600,000 Value at April ,800,000 2,800,000 Value at sale / death 3,250,000 3,250,000 Mortgage 1,250,000 1,250,000 Conclusions/ Notes n As the property is not being rented, under the corporate structure, the higher 15% rated of stamp duty and the annual ATED charge will be payable. n CGT will be higher for the company too as the entire amount will be taxed at 28% from the April 2013 value. n IHT is a major consideration however any investor should consider IHT consequences on the disposal in their own jurisdiction which is beyond the scope of this document. Stamp Duty on purchase 213, ,000 (15%) Estimated gross annual rental income 0 0 (assume 5% yield) Estimated net rental income 0 0 after all expenses Annual income tax 0 0 ATED 0 23,350 annually IHT on death 540,000 0 CGT on sale or gift 113, ,000

16 London Offices Canary Wharf City Colindale Ealing Fulham Greenwich Hammersmith Hampstead Head Office Highgate Hyde Park Kensington Kew Knightsbridge Surrey Quays Nine Elms Wapping International Offices Hong Kong (+852) India (+91) Malaysia (+603) Singapore (+65) Management & Accounts Management Accounts Short Lets