UK Residential Property Tax Changes

By Lynette Chaudhary, International Tax Manager, STM Fiscalis Ltd

A number of Gibraltar residents (individuals/companies/trusts) own UK residential property.

Gibraltar does not tax foreign rental profits and neither does it levy Capital Gains Tax (CGT). The tax position is somewhat different in the UK though:

The UK taxes UK rental profits even if the owner of the property is not UK resident.
From 6 April 2015 it also levies CGT on non-UK residents on the disposal of UK residential properties.
From 6 April 2017 all UK residential property will be subject to UK Inheritance Tax (IHT), currently certain non-domiciled individuals may not be liable to this.

The UK is clearly extending its grip on the taxation of UK residential property and keeping up to date with the rapid pace of legislative change can pose considerable challenges.

UK Income Tax

If the property is rented out, the rent less allowable expenses is liable to UK Income Tax. This remains the case even in the hands of a non-UK resident.

In the UK, there is a requirement for 20% tax to be withheld (by either tenant or agent) on rent paid to a non-UK resident. However, it is possible for a non-resident owner to register as a Non Resident Landlord (NRL) with HMRC. This enables the owner to receive the rent in full, achieving an important cash-flow advantage. However this does not mean that the rent is exempt from UK tax (a common misconception). The liability to tax on the rental profits remains in a NRLs hands, and an annual Self Assessment UK Tax Return (“Return”) must be filed.

The current Income Tax rates are:

For non-resident individuals – 20%, 40% or 45% depending on the level of taxable income (currently with a standard personal allowance of £10,600 for 2015/16, whether and to what extent non-residents continue to have entitlement to UK personal allowances in the future is under review).
For non-resident trustees (for most discretionary/accumulation trusts and most pension schemes) – 20% on the first £1,000 of taxable income, then 45% on all other (non-dividend) UK income.
For non-resident companies (not already within ATED, see below) – 20%.

UK Capital Gains Tax (CGT)

From 6 April 2015 disposals of an interest in UK residential property by non-UK resident owners will be liable to CGT if not already liable to ATED related CGT (see below). This is a significant change to the previous regime which, generally, allowed non-UK residents to realise gains on UK residential property free of UK tax.

The charge applies to gains from April 2015 and owners have a choice how to calculate this. The standard approach is by using an April 2015 market value as the base cost, so some owners have already been obtaining valuations. The gain must be reported to HMRC on the annual Return.

The current CGT rates are:

For non-resident individuals – 18% or 28% depending on the level of taxable income and gains (with an annual exemption being available, £11,100 for 2015/16).
For non-resident trustees – 28% (with half the annual exemption above).
For non-resident companies (not already within ATED) – 20%.

There are exemptions, which include non-UK pension schemes.

UK Inheritance Tax (IHT)

IHT is charged on transfers of value. It is most often paid on estates on death but can also be due on gifts made during lifetime and on certain transfers made in to and out of trusts. There are various exemptions and reliefs.

Generally the scope of IHT is determined by where an individual is domiciled, which very broadly means where their permanent home is. Historically UK domiciled individuals are liable to IHT on their worldwide estate, with non-UK domiciled individuals generally only liable on UK sited assets. Therefore if a non-domiciled individual owns shares in a Gibraltar company which owns UK property, the assets in his hands (i.e. the shares) are non-UK sited and therefore the value is outside the scope of IHT.

However on 8th July 2015, the UK Government announced that from 6 April 2017 UK residential property held directly or indirectly by non-domiciled individuals will become subject to IHT. This change will apply to all residential property, whether occupied or let and whatever value.

Annual Tax on Enveloped Dwellings (ATED)

In April 2013 ATED was first applied to high value UK residential property owned by a company. Currently this applies to properties valued at more than £1 million, from April 2016 this threshold will be £500,000. The reduction in this threshold coupled with an accelerating property market could soon mean that an ATED charge has to be considered in relation to all UK residential property held in enveloped structures.

The ATED charge is based on property value and currently ranges from £7,000 to £218,200 per annum. There are a number of reliefs, for example if the property is let to a third party on a commercial basis or if it is part of a property trading business. There is also a 28% ATED related CGT charge on capital gains.

In summary, now may be a good time to review current structuring, to address those changes which have already occurred and plan ahead for those which lie not far away on the horizon. With increasing transparency and enforcement powers internationally, the need for comprehensive tax advice will inevitably grow exponentially.