Our international clients and their advisers who hold UK property will be aware of the significant changes to the taxation of UK property over the past decade. UK residential property has been the subject of the majority of those changes, however, as from April 2019 there are also some fundamental changes to the taxation of commercial property and property holding companies.
It is more important than ever to make sure that you have tax advice before setting up a new UK property structure, or before purchasing, selling, gifting, or letting UK property. You should also make sure that you have recently reviewed any current UK property structures to ensure they are still suitable for your needs.
We recap here some of the changes that have happened recently and those that are effective from 2019 and 2020.
October 2018 Introduction of new capital allowances for new non-residential structures and buildings
April 2019 Gains on disposal of commercial property by non-residents will now be taxable
April 2019 Gains on indirect disposal of both residential and commercial property by non-residents will now be taxable
April 2019 Non-UK resident companies will be charged to Corporation Tax on their gains from the disposal of UK residential property, commercial property and indirectly held property
May 2019 A consultation on the proposed increase in the Stamp Duty Land Tax of 1% for foreign purchasers will close
April 2020 Non-UK resident companies will be charged to Corporation Tax on their property rental income from both residential and commercial property
Changes to the taxation of gains from disposal of UK property
Gains on disposal of residential and commercial property
Gains made on the disposal of residential property by non UK-residents have been subject to UK tax since April 2015, or longer in some circumstances.
Following the April 2019 changes, non-UK tax residents will also now be subject to gains made after April 2019 on the disposal of UK commercial property, subject to the exemptions and calculation rules detailed below.
Non-UK residents will also be taxable on certain indirect disposals of UK residential or commercial property, on gains made after 5 April 2019.
Disposals that will be within these rules will be where the shares in a property rich company (i.e. a company that derives 75% or more of its gross asset value from UK property) are sold, any shareholders who (along with connected persons) own 25% or more of the shares in that company, will be taxed on gains made on the value of those shares after April 2019, subject to the exemption and calculation rules below.
From April 2019 corporate non-resident landlords will be charged to Corporation Tax rather than Capital Gains Tax on their property gains.
The provisions relating to ATED-related Capital Gains Tax will be abolished.
Calculation of gain
If an asset is being brought into a capital gains charge for the first time as a result of these new rules, then the taxpayer will have the option to rebase any gains to 5 April 2019, meaning that for any such taxpayer, any gains prior to 5 April 2019 are not subject to tax. It is also possible to calculate the gain or loss on a disposal using the original acquisition cost of the asset. Ideally clients should obtain an April 2019 valuation for properties and shares that will be subject to the new rules.
There will be a trading exemption so that disposals of interests in property rich entities that are trading before and after the disposal will not be chargeable disposals where the land is used in the trade.
Corporation Tax Rate
|April 2020 onwards||17%|
This rate applies for both rental profits and chargeable gains.
Capital Gains Tax Rates
|Capital Gains Tax Rates|
|18% or 28% (depending on other UK income and gains)||Individuals who make gains on the disposal of residential property|
|10% or 20% (depending on other UK income and gains)||Individuals who make gains on the disposal of commercial property|
|28%||Trustees who make gains on the disposal of residential property|
|20%||Trustees who make gains on the disposal of commercial property|
Changes to the taxation of income for non-UK resident companies
Currently, non-UK resident companies that own UK property are subject to UK income tax on any rental receipts from residential and commercial property. From April 2020, the property business of non-UK resident companies will be taxed under the UK Corporation Tax rules and will need to file UK Corporation Tax returns.
Some of the key changes will be:
- The tax rate will fall from the current 20% Income Tax rate, to the proposed 17% Corporation Tax rate.
- These non-UK resident companies will need to file UK Corporation Tax returns rather than Income Tax returns.
- New notification, filing, and payment dates for non-UK companies will apply.
- Financing costs will fall under the loan relationship and derivative contract regime, which may limit the deductibility of finance costs in some cases.
- Corporate landlords holding UK property may be subject to the interest cap rules.
- Old losses and new losses will need to be kept separate and will be used in different ways.
Why hold UK commercial property via a non-UK company?
It will still be tax efficient for international investors to hold UK commercial property via a non-UK company for several reasons:
Protection from UK inheritance tax
A UK commercial property held via a non-UK company is excluded property for non-UK domiciled (and not deemed domiciled) individuals and for trusts that have been settled by non-UK domiciled (and not deemed domiciled) individuals, where the settlor is not yet deemed UK domiciled at the time of the transfer.
Lower tax rates under company ownership than personal ownership
From April 2020 the tax rate on rental profits for a company will be 17% compared with up to 45% for an individual.
From April 2019 the tax rate for UK commercial property disposals made by a company will be 19% (17% from April 2020) compared with 20% for an individual who is subject to higher rates of tax.
Stamp Duty Land Tax saving
Where the shares in a property holding company are sold rather than the underlying property, this will be subject to Stamp Duty rather than Stamp Duty Land Tax.
The Stamp Duty on the sale of UK shares would be 0.5%. Sale of the shares of an offshore company, such as an Isle of Man or BVI company, are normally free of stamp duty.
If the property is sold rather than the company, the UK Stamp Duty Land Tax rates will apply at between 0% and 5% for freehold commercial property.
A new Capital Allowance for new non-residential structures and buildings
The Structures and Buildings Allowance is intended to stimulate investment in new commercial structures and buildings. Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of two percent on a straight-line basis.
Relief will be limited to the original cost of construction or renovation, relieved across a fixed 50-year period, regardless of ownership changes. Neither land nor dwellings will be eligible for relief. Where there is mixed use relief will be reduced by apportionment.
Whether you are purchasing, selling, letting, or looking for the best way to hold your UK property, both now and for future generations, the SMP Partners group of companies can provide bespoke tax, structuring, and compliance services tailored to your needs.
SMP Accounting & Tax specialises in providing bespoke property structuring advice and compliance services for High Net Worth Individuals and their advisers. SMP’s tax specialists have a wealth of experience advising UK residents (both UK and non-UK domiciled) and international clients on their property and personal tax matters.
SMP Trustees and SMP Partners provide specialist trust and company services for property structures and have extensive experience looking after family property, residential and commercial property portfolios, and buy-to-let property.
If you would like further information on any of the points discussed above, or would like to discuss any UK tax related matters with one of our UK tax specialists, please speak to your usual SMP adviser or one of the contacts listed below:
Tel: +44 (0) 1624 683 254
Tel: +44 (0) 1624 682 267