5 Potential UK Tax Pitfalls to be aware of when investing in UK Property
South Africans planning to invest in UK property or those already owning UK property need to be aware of the ever-changing tax landscape they are exposed to. Investing in UK property is not as simple as it used to be.
5 Potential UK Tax Pitfalls to look out for:
- 1) Since the 6th of April 2017, the Inheritance Tax (“IHT”) net has been cast wider to include UK residential property owned through certain offshore structures, including most types of trust and overseas companies. The value of the shares of an overseas company holding UK property will now be subject to IHT on the beneficial owner’s death.
- 2) Non-Resident Capital Gains Tax (“CGT”) was introduced on the 6th of April 2015 and applies to non-resident individuals, trustees and companies. The company rate is 20%, and companies currently benefit from indexation relief. However, it is important to look out for the Annual Tax on Enveloped Dwellings (“ATED”) CGT if the ATED letting exemption has not always been available. Trustees are subject to CGT at the flat rate of 28%. All non-residents benefit from rebasing as of 5 of April 2015, but this applies at the date of sale/ disposal and not from the date when the charge took effect. This could be an easy potential trap for non-resident individuals who become UK tax resident without first selling or rebasing their property.
- 3) Stamp Duty & Land Tax (“SDLT”) is a once-off purchase tax applicable to all acquisitions of residential property over GBP40 000 by a company, discretionary trust or pension. Individuals will be subject to the surcharge of 3% over and above the SDLT applicable. Individuals will be subject to the surcharge unless the purchase is their only property (in the UK or elsewhere). The one exception would be where the UK purchase replaces their main residence which has been sold within the previous three years from the date of purchase. The charge is imposed on the full value of the cost of purchase, on top of the standard SDLT which is now charged at progressive rates. This effectively means that the rate of SDLT is 15% on the part of any residential property purchase exceeding GBP1.5mil.
- 4) Landlords can no longer enjoy full mortgage interest deductibility against the rental income they receive if they own the property directly and are exposed to the higher rate of tax (40%). This interest restriction does not extend to companies which own UK property.
- 5) Annual Tax on Enveloped Dwellings (“ATED”) is an annual tax that is relevant to UK residential property over GBP500 000 and not held directly by an individual or trust, but rather through a company, partnership or collective investment scheme. In relation to buy-to-let residential property, ATED will apply if an exemption does not apply such as the third party letting exemption.
What are the possible solutions?
Sovereign Trust (UK) Limited in conjunction with Sovereign Trust (SA) Limited are specialists in regard to structuring overseas and UK property arrangements to assist South African-based investors to purchase UK property. We have various structuring solutions tailored to the nature of the property, which include buy-to-let residential, primary residence, commercial property and/or the trade in land for development purposes.
Sovereign Trust (SA) Limited will be running various UK property structuring seminars in March and April 2018. If you are interested in attending one of these sessions, please contact Bryony Oostingh of Sovereign Trust (SA) Limited for more information or phone +27 76 170 0095 or +27 21 418 2170.