Introduction

In this article, we talk about the Tax considerations when investing in the UK real estate market.

Apart from Stamp Duty Land Tax (or SDLT) which has a non-UK resident surcharge of 2% on top of normal rates, the UK tax and legal system, unlike some other developed countries, does not generally discourage foreign investors from acquiring and holding UK property as an investment. One of the criticisms is that the UK tax system has in the recent past,
been too welcoming to foreign real estate investment money with dodgy sources such as

Russian oligarchs and tax avoidance money thus driving up prices in London’s prime West End market and stately homes in the countryside. UK real estate is seen as a safe place to invest foreign monies even though the UK’s rather generous tax rules have been tightened since 2017.

Basic tax considerations when investing in the UK Property Market:

• SDLT – this is a tax on the purchase of real estate in England and Northern Ireland (Scotland and Wales have similar taxes) by individuals, companies and other entities which is charged at various rates with a potential top rate on the slice of the price above £1.5m of 17% for non-UK residents and lower rates charged on the slices below £1.5m.
• ATED or annual tax on enveloped dwellings – this is an annual tax that is charged on companies and other entities owning dwellings worth more than £500,000 at various amounts and from 1 April 2023 the starting amount will be £4,150 on dwellings between £500,000 and £1m and the top rate on dwellings worth more than £20m will be £269,450. This tax reflects the fact that while in a corporate envelope, the shares in the enveloping entity can be sold free of SDLT.
• Capital Gains Tax – this tax is charged on gains on the disposal of residential property at 18% or 28% depending on the taxpayer’s UK income tax liability. For the tax year 2023/24 the annual exempt amount will be £6,000. Foreign individuals owning property-rich companies (75% or more of gross qualifying assets are land) will be liable to CGT at 10% or 20% on the disposal of the shares depending on the taxpayer’s UK income tax liability. Foreign companies owning UK investment property are subject to corporation tax on disposals of land held directly or through property-rich subsidiaries.
• Income tax – profits arising from rental income earned on UK property investments are charged to income tax or corporation tax at rates between 20% and 45% or 19% to 25%, respectively. A withholding tax of 20% applies to payments of UK rents to non-UK resident landlords under the non-resident landlord scheme although exemption is possible.
• Inheritance tax – property situated in the UK and owned by a non-resident individual is within the charge to IHT at rates of up to 40% on death as is a residential property held indirectly via a non-UK company or an excluded property trust.

What are the tax advantages of investing in UK property?

With the tightening of the UK tax rules relating to foreign investment in UK real estate and especially residential property, in recent years the tax advantages available to foreign investors are much less pronounced.

There is now a much more level playing field between foreign and UK investors for tax purposes. While there can still be tax advantages for foreign investors depending on the precise details, the main driver should now be the commercial rationale taking into account the UK’s relatively stable political and legal system (notwithstanding the recent political upheavals in the ruling Conservative Party).

Are there any drawbacks or issues when investing in property in the UK?

A recent development of note has been the UK’s Register of Overseas Entities (ROE), which requires overseas entities who own UK property to identify who their registrable beneficial owners are, register their details with Companies House, and keep these details up to date. The two main objectives of ROE are to help combat money laundering and achieve greater transparency in the UK property market.

What vehicles do people use to invest in property in the UK?

The most common types of entity are UK and non-UK incorporated companies and limited partnerships and LLPs with the latter especially useful for joint participation in property investment. A common form of structure will be a trust in the British Virgin Islands which owns a BVI or a Cyprus company which invests in UK real estate and which is administered in Switzerland. For larger commercial and residential property funds a Real Estate Investment Trust or REIT may prove tax efficient.

Conclusion

The tax considerations when investing in UK real estate are complex and require careful and thorough examination. The devil is in the details and the tax position of the foreign investor will be crucial along with their investment goals and appetite for commercial and tax risk. Every client is different and a bespoke approach to their tax needs and objectives is almost
always sensible.