Sovereign Published Articles
Tax traps when investing in UK property
Coreen Hayman
Newsletter of the IQUAD GROUP
August 2011
South African residents have long favored property in Britain as an investment. Now that the R4 million foreign investment allowance is available to South Africans, it is even easier to invest in property in Britain. As with any other investment, failure to consider the tax implications can be costly, so here are a few things to consider.
Inheritance tax
Inheritance tax is the biggest issue for most investors. Those who are non-domiciled and non-resident in Britain pay inheritance tax of 40% on their UK assets. The simplest way of avoiding this is to purchase the properties in the name of a non-British company. The asset owned by the individual is then the company shares, not the property. As long as the share register is kept outside Britain, the shares would not be considered a British asset and inheritance tax is eliminated.
For investors domiciled in Britain, the shares of the non-British company are still subject to 40% tax, but carefully structuring of the way the shares are owned can eliminate that too. So for Britain-domiciled persons living outside Britain, corporate ownership is still a good option. It allows subsequent transfers of the ownership to take place easily and cheaply by a transfer of shares, leaving the title to the property unchanged. This gives flexibility, which is absent with individual ownership.
Capital gains tax
Non-British residents do not pay capital gains tax so if a non-resident sells an asset in Britain, there would not normally be any capital gains tax to be paid. This is unusual as most countries do charge capital gains tax on the sale of assets located within their borders. There is a trap here for the unwary. If a property is purchased and sold quickly, there is a danger that the business of the owner will be assumed to be the buying and selling of property and the profits from that activity will be treated as income with a British source, not a capital gain, and will be taxable in Britain. If the property is purchased and then rented out for a number of years prior to resale, the business of the owner is assumed to be renting property and the sale is assumed to be an exceptional item. The sale is then treated as producing a capital gain. As capital gains made by non-residents are not taxed in Britain, the profit from the sale would generally escape British tax.
Income tax
Income from a business carried on wholly within Britain will always be taxable in Britain. Rent, by definition, is income generated on a business wholly carried on within Britain, so that income is always going to be taxable in Britain. If the property is rented, tax is levied on the amount of rent earned less any expenses incurred to generate that rental income. Such expenses would include maintenance, insurance, all property taxes and, most importantly, the interest on any loan used to purchase the property. Here lies another trap as, theoretically, interest on a loan taken out after the purchase is not automatically deductible. Strange but true. Deductions can also be made for flights to inspect the property and expenses of maintaining any corporate vehicle which owns the property.
Corporate Ownership
If you are a South African tax resident or planning to move to Britain, you should avoid being a director of a non-British company. If the company is managed and controlled from South Africa or Britain, it will result in nasty tax consequences. Corporate ownership will normally be the solution, but there are many traps there as well. As always, consider all circumstances and get proper advice.
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