The looming threat of Brexit and onerous recent legislation has made investing in buy-to-let property in the UK harder than ever for non-residents – but that shouldn’t deter South Africans looking to grow their wealth and enjoy returns in sterling.
UK real estate remains a popular investment choice for non-residents but investing in UK property is not as straightforward as it used to be due to multiple recent tax changes. The key is to structure the investment as tax-efficiently as possible in order to maximise profits. If you can avoid the tax pitfalls, you’ll benefit from a booming buy-to-let market in the UK, with attractive returns.
Since 2012, the UK government has significantly tightened anti-avoidance measures by non-residents. These include higher stamp duty taxes, the Annual Tax on Enveloped Dwellings (ATED) and a capital gains tax of 28% on the sale of UK residential property by non-UK residents.
However, it is still possible to use structures to mitigate UK tax on holding or acquiring UK property, whether it be for personal use, investment or development purposes. These involve the use of trusts, UK and foreign companies, and Qualifying Non-UK Pension Schemes (QNUPS).
Acquire property through a company structure, rather than in a personal capacity, will mean that net rental income is only taxed at a marginal rate of 20% rather than at 40% of the gross amount where property is held by an individual.
Many South Africans combine a UK property investment with tax-efficient offshore succession planning and retirement provision solutions, like a Guernsey ‘40(ee)’ international retirement plan or a Qualifying Non-UK Pension Scheme (QNUPS). These structures are able to hold shares in underlying company structures, so it makes sense to combine them with UK property investing where it is appropriate for a client’s needs and domicile.
Sovereign’s ‘40ee’ plan – branded as the Conservo International Retirement Plan – is specifically tailored to the South African market and is a very effective estate planning and diversification tool. Sovereign has also developed a multi-member QNUPS – branded as the Brock Personal Pension Plan – that is approved by the States of Guernsey Income Tax Office and also satisfies the necessary conditions to be regarded as a QNUPS for UK purposes.
The Conservo and QNUPS are permitted to make payments to non-Guernsey resident individuals without deduction of tax. By using such structures, investors also avoid additional UK taxes levied on discretionary trusts, like UK Inheritance Tax (IHT), which would apply in a succession situation, as well as the UK’s 10-yearly trust charge, which can be as high as 6%.
A QNUPS is also efficient in terms of capital gains tax when investors want to sell their properties and can be used to reduce Stamp Duty Land Tax (SDLT).
It is essential to seek independent tax advice and to rely on a trusted financial adviser or property broker when investing in offshore property. Offshore investments are a key part of any balanced portfolio, but they can turn into a nightmare if they are structured incorrectly.
Please contact Bryony Oosting.