Investing in UK property remains popular, however, there are lots of traps for the unwary investor.
Whether it is residential or commercial, new builds or Georgian townhouses, UK and international investors continue to look to the UK property market despite the uncertainties over Brexit. UK real estate is as popular for legislators as it is for investors; there have been many changes to its tax treatment over the past few years. Purchasing and holding UK real estate in an inappropriate structure could have significant tax consequences.
The rules surrounding UK real estate are complex, largely due to their piecemeal development as successive Governments have sought to tinker with the rules. Even though the Government has Brexit to contend with, they have introduce some changes that are due to come into force in the next tax year (beginning 6 April 2020) and there could be more changes with a new Government following the scheduled December general election.
Changes over the past few years
In terms of residential property, the significant issues to consider are that with personal ownership, mortgage relief is restricted to the basic rate income tax (20%) and there is an 3% SDLT surcharge when purchasing additional properties.
The changes in relation to residential property owned through companies (often offshore companies that are ultimately owned by non-UK domiciled individuals) include 15% SDLT charge on purchase by a company and ongoing Annual Tax on Enveloped Dwellings charge.
There were notable changes to how international individuals are taxed on residential properties held by offshore companies which removed their beneficial tax treatment. Offshore companies owned by non-UK domiciled individuals are now effectively transparent for inheritance tax purposes and all non-residents are subject to capital gains tax on the disposal of UK residential property.
Commercial property is not such a hot topic for legislators however, changes mean that non-UK residents will now be subject to tax on gains on all disposals of UK land.
Changes on the horizon
As mentioned, despite Brexit taking up a lot of the Government’s time, they have had time to introduce a few changes in relation to residential property that are due to come into effective on 6 April 2020.
One change that is likely to affect many is the reduction in the final period exemption for Principal Private Residence (“PPR”) relief. The final period exemption effectively extends the capital gains tax (“CGT”) relief, for property that was once someone’s principal private residence, by 18 months after occupation has been given up. However, this final period exemption is being reduced to 9 months.
Another CGT relief that is going to be subject to change is lettings relief. This relief applies to a property that has been a person’s main home and at times has been let out. The relief will be restricted to circumstances where the homeowner shares occupation with the tenant.
The last change of note is the time to pay CGT on the disposal of residential property. Currently taxpayers report and pay the tax by the end of January following the year in which the gain arose. This means that taxpayers have 10 to 22 months to report and pay CGT, depending on the timing of the property disposal. Changes that come into effect on 6 April 2020 will mean that a CGT return will need to be submitted, and payment on account of CGT will need to be made, within 30 days of completion of the disposal of the property, whether this is a sale or gift to an individual or trust. This will mean many investors having to ensure they have sufficient cash flow at the time of disposal.
Theresa May’s Government announced, in September 2018, that it was considering a 1% SDLT surcharge for purchases by non-residents purchasing real estate in England and Northern Ireland. A consultation was published and closed in May 2019. It remains to be seen whether this or future Governments will press ahead with this measure.
Purchasing and holding UK property – which structure?
The appropriate structure will depend on a number of factors including whether the property is commercial or residential, the investment time horizon and whether mortgages will be used to purchase the properties. Investors also need to think about whether they will live in the property at some point, if there will be any rental income produced and whether they want to pass the assets on to the next generation.
It is important to carefully consider all the issues and seek expert advice to ensure UK property works for investors.