By Rebecca Ellis
WED, 31 AUGUST 2016-The imminent arrival of Brexit has already started a raft of changes to the UK landscape. Last week the UK government announced that they were seeking to scrap the human rights act and substitute with a political lead law which didn’t even make UK headlines.
We take a look at other changes that have been slip under the carpet by the current UK government and in the area of a favoured investment theme: UK Property.
The basic tax regime which applies to UK residential property is that a transfer tax (Stamp Duty Land Tax) is payable by the purchaser, income tax is paid on any rent, capital gains tax may be payable on sale and inheritance tax is chargeable on death or if the property is subject to lifetime estate planning using a trust.
For an international investor capital gains tax was of no concern and ownership through a non-UK company provided complete protection from inheritance tax. Even SDLT could be avoided perfectly legitimately, although this was not generally something we advised. Over the course of the next few weeks we will look at the New Realities of the tax regime on UK properties for ALL investors
The old regime
The basic tax regime which applies to UK residential property is that a transfer tax (Stamp Duty Land Tax) is payable by the purchaser, income tax is paid on any rent, capital gains tax may be payable on sale and inheritance tax is chargeable on death or if the property is subject to lifetime estate planning using a trust.
For an international investor capital gains tax was of no concern and ownership through a non-UK company provided complete protection from inheritance tax. Even SDLT could be avoided perfectly legitimately, although this was not generally something we advised.
The new situation
Inheritance tax
Inheritance tax will now apply to all residential property.
Where a UK or non-UK resident individual owns UK property directly then on their death it is taxed at 40% to the extent the value exceeds £325,000. There may be an exemption for property passing to a spouse or civil partner. Tax can also apply to property gifted to someone else if the donor does not survive seven years or reserves a benefit in the property. Where a property is mortgaged this may reduce its value for inheritance tax purposes.
Inheritance tax may also be chargeable on transfers of property to a trust and on property held in a trust. Currently if a non-UK domiciled individual holds their property through a non-UK company (including where the company is held in a trust) this prevents the application of inheritance tax.
The government have confirmed on August 19th 2016 from April 2017 the shares in the non-UK company will be treated as chargeable to inheritance tax. This could result in inheritance tax on the individual’s death or, if the company is held in a trust, on other occasions. Additional the government have confirmed that there is no relief for Stamp Duty Land Tax or Capital Gains Tax which will be trigger if the properties are taken out of these structures(known as de-enveloping) These structures should be reviewed as a matter of urgency with a view to action being taken before April 2017.
Stamp Duty Land Tax
SDLT is now payable at rates of up to 15% if a company is used to purchase
SDLT is a tax paid on the acquisition of property at the rates below:
The amount up to £125,000 0%
£125,001 to £250,000 2%
£250,001 to £925,000 5%
£925,001 to £1,500,000 10%
Amount in excess of £1,500,000 12%
Where a second home is purchased then an extra 3% SDLT is added. This also applies for the first purchase by a company. Where residential property worth more than £500,000 is purchased by a corporate entity SDLT is charged at a flat rate of 15% unless a relief applies. There is relief if it is intended to let the property to a third party on a commercial basis or if the purchaser is a property developer who intends to develop and sell the property.
Where multiple properties or mixed use properties are purchased different rules apply and multiple dwellings relief or non-residential rates of SDLT may be available.
Annual Tax on Enveloped Dwellings (ATED)
There is a new annual tax on properties owned by companies ATED is an annual charge on residential property owned by companies, partnerships with a corporate partner and funds. The amount of ATED charged is shown in the table below. ATED was introduced in April 2013 for properties worth more than £2m and now applies to any residential property worth more
than £500,000. The same reliefs apply as for 15% SDLT. An ATED return must still be filed to claim this relief.
(from 1 April 2016)
£500,000 to £1m £3,500
More than £1m to £2m £7,000
More than £2m to £5m £23,350
More than £5m to £10m £54,450
More than £10m to £20m £109,050
More than £20m £218,200
Income tax
Where a property is rented tax is due at rates of up to 45% for individuals and 20% for companies.
Interest on borrowing and other allowable expenses are deductible from income, but interest relief is being reduced for individuals.
Capital gains tax
Non-resident individuals, companies and trustees are now taxable on gains
For individuals the gain realised on the sale of a property is taxed at 18% or 28%. Since April
2015 this also applies to non-resident individuals, although they are only taxed on the gain above the value in April 2015. There is potentially complete relief from tax for the gain on a person’s principal private residence (PPR relief), but they must spend at least 90 nights per year in the property for this relief to be available. Where a UK company disposes of a property it is taxed on the gain at corporation tax rates (currently 20%). PPR is not available.
Where a non-UK company disposes of a property where ATED applies it is taxed at 28% for the growth in value since April 2013 (or the acquisition date if later) or if ATED does not apply, it is taxed at 20% on the growth since April 2015. PPR relief is not available. Furthermore if the company is owned by a UK resident individual (or a trust settled by such an individual) then the individual may also be taxable on the gain (with PPR relief not being available).
Contact Rebecca Ellis @Pomona Wealth. + 41 79 789 5313 or rebecca.ellis@pomonawealth.com
