A basic overview of U.K. property related taxes as well as an update on recent legislative changes that may affect the way clients structured their affairs
At any given weekend, it is clear from advertisements in the local Hong Kong newspapers that United Kingdom property is being actively marketed to Hong Kong investors in a big way. At the same time, U.K. property taxes increasingly apply to non-resident investors. While welcoming investors to the U.K., it is important to ensure that they are aware of their obligations as well as the profits to be made. Advisors have an important role to play in this. At a recent event hosted by the Hong Kong Institute of CPAs, representatives from the U.K.’s tax agency, Her Majesty’s Revenue and Customs (HMRC), presented on U.K. taxes, including property taxes. This article considers these taxes.
Stamp duty land tax
Your clients must pay stamp duty land tax (SDLT) if they buy property or land over a certain price in England and Northern Ireland. (Land and Buildings Transaction Tax applies in Scotland and Land Transaction Tax in Wales).
The current SDLT thresholds are £125,000 for residential properties and £150,000 for non-residential land and properties. SDLT applies when:
- Buying a freehold property
- Buying a new or existing leasehold
- Buying a property through a shared ownership scheme
- Transferring land or property in exchange for payment, for example your client takes on a mortgage or buys a share in a houses
Tax residence status in the U.K. makes little or no difference whether your client will have to pay stamp duty or not, as the charge is typically determined by factors such as where in the U.K. the transaction occurs, the type of property or land concerned and the type of purchaser.
You should note that there is a consultation ongoing seeking views on the design of a 1 percent SDLT surcharge on non-U.K. residents purchasing residential property in England and Northern Ireland so this situation may change.
Your clients may also have to pay an additional 3 percent on top of normal SDLT rates if their purchase of a new residential property means they will own more than one property. (This higher rate may not apply if contracts were exchanged before 26 November 2015).
An SDLT return must be sent to HMRC and the tax paid within 14 days of completion. This changed this year, and was previously 30 days.
There are different SDLT rules and rate calculations for:
- Corporate bodies
- People buying six or more residential properties in one transaction
- Shared ownership properties
- Multiple purchases or transfers between the same buyer and seller (linked purchases)
- Purchases that mean your client owns more than one property
- Buying residential property through companies and trusts
These special rules can make a big difference to the amount of SDLT due and it is important that clients take the right advice, particularly when buying property in England and Northern Ireland from overseas.
For example, SDLT is charged at 15 percent on residential properties costing more than £500,000 bought by certain corporate bodies or “non-natural persons”. These include companies, partnerships and collective investment schemes. This rate doesn’t apply to property bought by a company that is acting as a trustee of a settlement, or bought by a company for use as:
- Property rental business
- Property developers and traders
- Property made available to the public
- Financial institutions acquiring property in the course of lending
- Property occupied by employees
Although, specific conditions apply to these exclusions.
There is a general 3 percent surcharge on residential properties bought by companies. Further guidance on special rules is available alongside a SDLT calculator on the U.K. government website, gov.uk.
Income tax on rental income
Rental income from property situated in the U.K. arises in the U.K. and is therefore due for taxation in the U.K. – even if your client is not U.K. resident.
If your client lives outside of the U.K. for six months or more a year, has bought property in the U.K., and that property is being let, then your client will be within scope of the Non-Resident Landlords Scheme (NRLS) and be classed as a “non-resident landlord” for these purposes by HMRC.
If so, your client’s letting agent or, if your client does not have an agent, their tenants should be deducting basic rate income tax before paying the rents over to your client, so your client receives the lettings income net of income tax. The agent or tenant must pay the tax withheld to HMRC.
At the end of the tax year whoever has withheld the tax from the rents on your client’s behalf should issue a certificate to your client saying how much tax has been deducted. If the tax deducted is not enough to cover your client’s tax liability for the year (perhaps if tax is due at higher rates) then your client must complete a Self Assessment tax return and pay the balance due, similarly if too much tax has been deducted then your client may claim a refund.
If your client wants to receive their rental income gross (i.e. with no withholding tax deducted) they may opt to do so but they must then pay tax on their rental income direct to HMRC via Self Assessment. To do so, HMRC must give approval and an application can be made using a form NRL1i.
Your client may need to pay tax to HMRC (as country of origin for the income) as well as the country in which your client is currently tax resident. However double taxation relief may apply if there is an applicable double taxation agreement.
Companies and trusts
Companies and trusts are also within scope of the NRLS. A company is a “non- resident landlord” if it receives income from renting U.K. property and either it’s main business premises is outside the U.K., or it’s incorporated outside the U.K.
If the company is resident in the U.K. for tax purposes then they are not within the scope of the NRLS. This includes U.K. branches of companies based abroad if they’re registered for corporation tax.
A trust is a non-resident landlord if it receives income from renting U.K. property and all trustees live outside the U.K.
Companies can apply for rental income without deduction of tax using form NRL2i. Trusts should apply using form NRL3i.
From 6 April 2020, non-resident companies that carry on a U.K. property business or have other U.K. property income will be charged to corporation tax rather than income tax. However, where a company has tax deducted by an agent or tenant, the withholding tax will still be calculated using the basic rate of income tax.
Changes to tax relief from April 2017
Your client will be able to claim a deduction from rental income for certain expenses incurred in their Self Assessment. The amount of Income Tax Relief some landlords can get on residential property finance costs is gradually being restricted to the basic rate of tax. This will be in full by 2020-2021. Your client may be affected if they’re a:
- U.K. resident individual that lets residential properties in the U.K. or overseas
- Non-U.K. resident individual that lets residential properties in the U.K.
- Individual who lets such properties in partnership
- Trustee or beneficiary of trusts liable for Income Tax on profits
Please note that residency for this purpose is defined differently than for the NRLS. You can find out more about the changes on the tax relief for residential landlords guidance webpage and the Property Income Manual.
Annual tax on enveloped dwellings
There has been a requirement in the U.K. since 2013 for owners of enveloped dwellings (where the property is held through a non-natural person) which meet a valuation threshold of £500,000, to file a return on or after 1 April of the relevant chargeable period. Returns must be filed and tax paid within 30 days of the start of the relevant chargeable period. Some properties are not classed as dwellings. These include:
- Hotels or similar establishments
- Boarding school accommodation
- Student halls of residence
- Military accommodation
- Care homes
There are a range of annual charges depending on the value of the dwelling. These range from £3,650 to £232,350 for properties worth more than £20 million during the 2019-2020 financial year. Annual tax on enveloped dwellings (ATED) has fixed revaluation dates which occur every five years from 1 April 2012, with the next revaluation date being 1 April 2022.
ATED related capital gains tax
If your client was subject to ATED charges and disposed of property before 6 April 2019 then they will need to file an ATED related capital gains tax (CGT) return. Returns must be filed by 31 January after the chargeable period. ATED related CGT has been repealed for disposals on or after 6 April 2019 and replaced by corporation tax.
CGT on property disposals by non-residents
From 6 April 2019 CGT applies to disposals of all U.K. land and property (including interests in off plan property) by individuals (including trustees, partners and personal representatives of deceased persons) who are not resident in the U.K. Prior to 6 April 2019, CGT only applied to disposals of residential property. A return must be filed and paid within 30 days of completion of the conveyance or late filing penalties may fall due. A return must be filed even if your client has no tax to pay, has made a loss, or is registered for Self Assessment.
The main rates of CGT are 28 percent for residential property gains and 20 percent for other gains. Any gains under the person’s unused income tax basic rate band are charged at 18 percent (for residential property) or 10 percent.
From 6 April 2019 non-resident companies will be charged corporation tax on gains rather than CGT for all U.K. land and property disposals.
Losses are calculated following the normal CGT rules and therefore must be set to reduce any property or land related gains above the annual exempt amount (where eligible) in the year the loss arises. Excess losses may be carried forward to set against property or land related gains of future tax years. In order for a loss to be claimed a return must be submitted.
If your client’s residence status changes:
- From non-resident to U.K. resident they’ll be able to use unused losses on U.K. property or land against general gains
- From U.K. resident to non-resident they’ll be able to use unused losses from U.K. property or land to set against gains from U.K. land and property
This article is not intended to be exhaustive and other taxes may arise during the purchase, ownership and disposal of U.K. property. If you have further questions please contact HMRCOffice.HongKong@fco.gov.uk. Failure to apply U.K. taxes correctly may be considered tax evasion by HMRC and professional advice should be sought when investing in the U.K.
Actively seeking to facilitate the evasion of U.K. taxes may be considered a criminal offence of aiding or abetting and may also result in charges being considered under the extra-territorial Corporate Criminal Offences of Failure to Prevent the Facilitation of Tax Evasion.
To report concerns anonymously, please contact HMRC’s fraud hotline at 44 (0) 203 080 0871 (outside the U.K.) or 0800 788 887 (inside the U.K.).
This article is contributed by Her Majesty’s Revenue and Customs