It was common practice, until recently, for non-UK domiciled individuals – whether UK resident or non-resident – to acquire UK residential property through overseas companies, even where the property was for personal occupation rather than investment or trading purposes. Non-resident structures provided confidentiality and shelter from UK inheritance tax (IHT), while stamp duty land tax (SDLT) did not apply to the sale of shares in a company.
After the global financial crisis, however, the UK government has introduced a raft of anti-avoidance measures targeting UK residential property owned or acquired by non-natural persons (NNPs) – whether UK resident or not. These included:
• Higher rate (15%) of SDLT for residential property, effective from 21 March 2012
• Annual Tax on Enveloped Dwellings (ATED) on high-value UK residential property owned on, or acquired after, 1 April 2013
• A capital gains tax (CGT) charge (28%) on ATED-related gains on disposal, effective from 6 April 2013
Initially the SDLT and ATED charges affected only high-value (over £2 million) UK residential property owned or acquired by NNPs. These thresholds were subsequently lowered to capture property valued over £500,000.
Further measures were then introduced affecting all owners – companies, trusts, partnerships and individuals:
• A non-resident CGT (28%) regime was applied to gains arising on the sale of UK residential property by non-UK residents, including non-UK resident trusts, from 6 April 2015
• An additional 3% SDLT surcharge was applied to purchases of UK residential property if the acquirer already owns another residential property
In addition, the government announced that from 6 April 2017 all UK residential property held directly or indirectly would be brought within the charge to IHT. This applies to all UK residential properties, regardless of whether they are let commercially. The scope of the rules is very wide and also catches any loan that is used to acquire, maintain or enhance UK residential property, or any collateral or guarantee provided in respect of such loans.
From April 2016, all UK entities were required to keep a register of people who have significant control (PSC) over the entity and, from June 2016, such information started to become publicly available at a central PSC register held at Companies House.
The Finance Act 2016 also introduced new rules to tax profits from trading in and developing UK land for disposals of property on and after 5 July 2016. The aim was to ensure that overseas property developers and investors pay income tax or corporation tax on the profits realised from the development of or trading in UK land in the same way as UK-based property developers and traders.
These anti-avoidance rules have severely limited tax planning options in respect of UK residential property. Commercial property has been largely unaffected by the new measures. If the property is part residential and part commercial a reasonable apportionment is required; only the residential part will be subject to the new measures.
However, it is still possible to use structures in appropriate cases to mitigate UK tax. Sovereign UK has devised a number of fully compliant solutions to minimise UK tax exposure on holding or acquiring UK property, whether it is for personal use, investment or development purposes. These involve the use of trusts, UK and foreign companies, and Qualifying Non-UK Pension Schemes (QNUPS).
• Principal private residence relief (PPR) will be available in appropriate circumstances
• IHT planning can still be achieved provided that the relevant buy-to -let residential property is not owned by a natural person (for example if company shares are held within a QNUPS)
• Non-main UK residences that are not rented to independent third parties and therefore unable to claim the letting exemption should be owned by a trust or QNUPS
• Substantial planning with regard to purchasing UK commercial property can be structured if a suitable property is owned by an Isle of Man entity. CGT and IHT should not then apply
• In most circumstances, a UK company should be used when purchasing UK land for development and trade
Sovereign has long experience in structuring real estate ownership. We appreciate that each situation presents a unique set of circumstances and will work to structure ownership of real property to a client’s advantage.