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Navigating new UK tax regulations for non-UK property owners
For Hong Kong people who plan to purchase a residential property in the Uk, whether it is for their children who study abroad, investment or retirement purpose, the time has come to review this decision and plan carefully. The reason I say this is because the UK has now introduced a new capital gains tax charge for non-UK residents disposing of UK residential properties, effective from April 6 2015 onwards
Brendan Harper 30 Sep 2015
 
   

For Hong Kong people who plan to purchase a residential property in the UK, whether it is for their children who study abroad, investment or retirement purpose, the time has come to review this decision and plan carefully. The reason I say this is because the UK has now introduced a new capital gains tax charge for non-UK residents disposing of UK residential properties, effective from April 6 2015 onwards.

 
The rate for individuals is either 18% or 28% (on the increase in value, not including the original purchase value), depending on whether they are higher rate taxpayers or not, and 20% for corporate owners. This move – along with other related changes – brings to an end a long standing benefit that allows non-UK residents to be exempt from paying capital gains tax (CGT) on UK property. In fact, this is not the first attempt by the UK to change the taxation treatment of UK residential property investment over the past few years.
 
Back in 2012, the UK announced several significant changes to the taxes payable on UK residential property. Regardless of their domicile, these new measures essentially affected both existing owners and new buyers, although only those who held properties via corporate vehicles or trusts.
 
Following these changes, corporations purchasing UK residential properties valued at over £2 million had to pay 15% stamp duty land tax on a property purchase and then had to pay an annual charge, at amounts between £15,000 and £140,000 per annum depending on property value (these have now increased very slightly, and the property value threshold has fallen to £1m, with a further fall to £500,000 planned in 2016).
 
Furthermore, property owners who were “non-natural persons”, including offshore companies, would have to pay capital gains tax at the rate of 28% on profit made upon the sale of a property.
 
Prior to these changes, it was not uncommon for people to hold properties through companies for tax purposes in order to be exempted from paying stamp duty land tax and inheritance tax. The rationale behind this was that UK properties are potentially subject to an inheritance tax of 40%, and this applies to non UK resident and domiciled owners if their total UK assets exceed the “nil rate band” – currently £325,000 per person. So whereas a Hong Kong resident and domiciled person leaves UK property valued at £2 million to his or her children for example, the tax would equate to £670,000 – no small amount. For now, investors can remain exempt from inheritance tax in these circumstances by holding the property via an offshore company, but the price one pays is increased stamp duty land tax, the annual charge and capital gains tax on profits made on sale of the property.
 
I say “for now”, because the UK Government has recently announced plans to charge Inheritance Tax, from April 2017 onwards, on UK residential property owned by non-UK domiciled individuals, regardless of whether it is held directly or via an offshore structure.
 
These changes are prompting owners and prospective buyers to review their options regarding whether to hold a property personally or via another vehicle. Consider the following scenario: purchasing a £5 million property through a corporate vehicle means paying stamp duty land tax at 15% (£750,000), an annual charge of £35,900, capital gains tax of 28% upon sale of the property, as well as the inevitable company administrative costs. Whereas purchasing the same property in one’s own name would mean paying stamp duty land tax at a lower 7% (£350,000) but with a potential inheritance tax bill of £1.87 million based on the value of the property today.
 
Which scenario is more beneficial? That of course, depends entirely on a buyer’s personal circumstances. For example, the elderly or people who plan to sell in the near term may want to continue to hold their properties in companies and pay the annual charge; young home owners or long term investors on the other hand, may prefer holding the property directly in order to benefit from a lower stamp duty land tax and no annual charge or capital gains tax, and cover the inheritance tax liability with a life insurance policy.
 
With these changes, one would have expected to see a decline in the use of companies to hold properties, but this has not been the experience to date. The original estimate for the increased stamp duty land tax and annual charge was £35 million, but in 2013/14, the actual figure is closer to £100 million! Perhaps this is explained by the inheritance tax savings being a key advantage that makes the other charges more palatable.
 
However, the position has now changed again, as the new rules broaden the exposure to more non-resident property owners.

 

By Brendan Harper is Technical Services Manager of Friends Provident International

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