Sovereign Accounting Services Limited
PROPERTY PURCHASE IN THE UK - TAX CONSIDERATIONS
INHERITANCE TAX
The general rule is that the death of the owner of UK situated property gives rise to a charge to UK inheritance tax irrespective of the domicile or residence of that owner so non-resident individuals could not avoid paying UK inheritance tax on the value of any property they had within the UK on their death without taking suitable precautions. The current rate of inheritance tax is 40% although the first £325,000 of value is exempt. It is important to note that the value of ALL property and assets situated within the UK must be aggregated and inheritance tax is payable on the total. Therefore, if a non-UK investor has several UK properties the total inheritance tax bill would be 40% of the amount by which total value exceeds £325,000.
If property is purchased in the name of a non-UK company then, as a corporation never dies, UK inheritance tax is avoided.
INCOME TAX
Rental income generated by the letting of a UK sited property owned by an offshore company is calculated as though it were the profits of a trade or business carried on within the UK but is taxed as investment income at the basic rate of income tax, currently 21%. The rent is therefore subject to UK tax irrespective of the method of ownership. Sums spent on maintenance, repairs (but not improvements) insurance, rates and, most importantly, interest payable in respect of any loan taken out to purchase the property may all be deducted from rental income prior to the calculation of the tax due. Where properties are owned by a company as an investment the company may additionally deduct management expenses (TA 1988 Section 75).
CAPITAL GAINS TAX
If a profit is realised on the resale of a UK property then UK resident individuals and companies would be subject to capital gains tax on the gain in value with some relief for inflation and length of ownership. Further reliefs may be available where the property has been the individual’s principal private residence with an additional relief if a let property has been an individual’s principal private residence at some time during the period of ownership. Capital gains tax is not payable by non-residents of the UK but there is precedent to suggest that if a property is resold in a relatively short period of time then the profit might be treated as profits of a trade carried on within the UK (the trade being the purchase and sale of the property) and charge to income rather than capital gains tax. However, if the property is held and being let, for a period of at least 3 years the presumption that the profit on resale is other than a capital gain made incidental to the real business of letting of UK property can be avoided.
STAMP DUTY
Stamp Duty on higher price properties in the UK is significant and from April 2011 the rate of Stamp Duty pursuant to a property purchase exceeding £500,000 will be 4%.
If a UK property is owned by an offshore company then Stamp Duty may be avoided by effecting a sale of the property by a transfer of shares in the company leaving the title to the property unaltered. Stamp Duty is payable by the purchaser but, of course, the ability to offer a prospective purchaser a way to avoid the Stamp Duty charge will significantly decrease his acquisition costs and therefore add to the attractions of the transaction. Alternatively, the seller may be able to charge more for the property.
Sovereign have considerable expertise and experience in establishing special purpose vehicles for UK property ownership. Long term non-UK domiciled persons as well as UK domiciled and resident individuals that wish to invest in UK real estate must take extreme care with regard to establishing trusts and offshore companies for UK property ownership. Tailored advice can be given upon request.