UK residential property ownership, especially for individuals living outside the UK, is now more complex than ever before and will become increasingly so this year and next, when more properties are dragged into a widening UK tax net. A large proportion of overseas owners of UK residential property are based in Asia, in particular Hong Kong and Singapore, and so advice should be sought to determine whether the recent changes will impact them and whether any re-structuring of ownership is required.
A sweeping measure, effective from 6 April 2015, extends the charge to UK capital gains tax (CGT) to all non-UK residents who own UK residential property regardless of its value and irrespective of whether it is let or owner-occupied. Prior to this date, aside from the recent Annual Tax on Enveloped Dwellings (known as ATED), non-UK residents have not been subject to CGT.
The new charge will apply to gains accruing on the disposal of UK residential property made by individuals, trustees and narrowly controlled companies on or after that date, making the April 2015 valuation key. The rate for non-UK resident individuals will be up to 28% and for non-UK resident trustees will be 28%. However, the rate for non-UK resident companies will only be 20%, which provides an additional incentive for corporate ownership.
Relief from this charge, unless held through a corporate, can be obtained if the property qualifies as a 'main residence' at any point during ownership (known as Principal Private Residence or 'PPR' relief). Before 6 April, owners of more than one home could elect which one was their 'main residence' for these purposes. However, under the new rules, this would allow non-UK residents to very easily escape the new charge so the government has restricted access to PPR relief in circumstances where a property is located in a territory in which a taxpayer is not resident. In those circumstances, a UK home will only be capable of being regarded as the person's only or main residence for PPR purposes for a tax year where the person meets a new 90-day test for time spent in the property over the year.
However, for non-UK residents, satisfying this 90 day test for a UK home may have a wider impact on an individual's UK residence status. Professional advice should be sought to ensure that the non-UK residence is not jeopardised and pre-residence tax planning is undertaken if it is.
If a property is let out, it is important to know that UK rents are liable to UK tax even if the landlord is based outside the UK. Generally, rents must be paid to an overseas landlord with 20% UK tax withholding taken off at source (either by the tenant or their agent). However, if you register under the UK Non-Resident Landlord Scheme you can receive rents without the deduction of tax or the need for your agent to file quarterly returns to HM Revenue & Customs (HMRC).
Once in the scheme, you simply submit your annual UK tax return, reporting your UK rental income and expenses and pay any tax on the net rents. This provides both a timing advantage and relief for allowable expenses.
Since 2013, where a company or similar vehicle owns UK residential property they have been exposed to a brand new tax, an extension of an existing tax and a higher rate of yet another tax.
The new tax is ATED. It is essentially a wealth tax applied to UK property and was designed to stop individuals owning property through corporate vehicles and avoiding various UK taxes. The charge was originally only imposed on properties worth at least £2 million (US$3.05 million) on 1 April 2012 (or at acquisition, if purchased later). However, this was extended to properties worth £1 million or more from 1 April 2015 and will extend to those worth £500,000 or more from 1 April 2016. This will particularly impact owners living in Hong Kong and Singapore who use offshore companies to own UK residential property.