The Tax Implications of Foreign Domiciliaries Buying UK Real Estate

With effect from April 2019, the scope of UK taxes on gains realised on, or in connection with, UK real estate has been extended to include the following;

1. Non-residents without a permanent establishment in the UK can now be taxed on gains realised on the disposal of UK commercial property. Until now, such tax exposure has only existed with respect to UK residential property.
2. There is now scope for a UK tax charge on a non-resident disposing of an asset that is not itself UK land, but derives all or most of its value from UK land – whether such land is residential or commercial. Clearly, this is aimed at shares and securities issued by property holding companies.

There are various rebasing dates, depending on the nature of the asset. Importantly, ATED-related CGT is being abolished, and for any company currently within the scope of that tax, all residential property purchased prior to April 2015 can  now be rebased to April 2015. However, ATED itself is being retained.

The ‘all or most’ referred to above is the requirement for the asset to derive at least 75% of its value from UK land, whether directly or through assets that themselves derive their value from UK land.

Moreover, the tax charge on indirect disposals will only apply if the person making the disposal has a substantial indirect interest in the underlying UK land. In relation to a company, the requirement is broadly that the person making the disposal has 25% or more of the voting rights, or an entitlement to 25% or more of a distribution or the proceeds of a liquidation. This requirement must be met at some point in the period of two years running up to the date of the disposal. Shareholdings of connected persons must be included when calculating whether the 25% threshold has been breached.

Two points to note are;

1. There is scope for the same economic gain to be taxed twice if a non-resident shareholder disposes of his shares, realising a post-April 2019 gain on which he is taxable and the company then disposes of the property, realising a gain which is taxable on the company.
2. Non-resident trustees and individuals realising post-April 2019 gains in respect of indirectly owned residential property will be taxed on such gains at ordinary rates (10%/20%), instead of the elevated rates that apply to residential property gains (18%/28%).

Furthermore, the Government has announced an intention to amend the rules on UK property income with effect from April 2020, so that from that date any such income accruing to a company will be within corporation tax. Currently, rental income of a non-UK resident company is subject to basic rate income tax in the company’s hands.

Structuring:

There are still significant differences between the treatment of UK residential and commercial property. IHT planning through the use of a property holding company is still possible where the underlying property is commercial. The shares in such a company are excluded property in the hands of a non-UK domiciled and non-deemed domiciled shareholder, provided that those shares are non-UK situated (e.g. on the basis that the company is not UK registered and that the shares  are registered, and the register is kept outside the UK). In addition, the default 15% SDLT rate for corporate purchasers of UK residential property does not apply to commercial property purchases.

However, for an UK resident non-UK domiciled individual, it may be preferable for the company to be managed and controlled from the UK, so that there is no possibility of the company’s income/profits being attributed to him under the transfer of assets abroad legislation.

By contrast, where UK residential property is concerned, there may be an advantage where the property will be let to third parties on commercial terms, or will be redeveloped, so that the 15% SDLT charge will not apply to the purchase, and relief will be available from ATED, and subsequent rental profits or redevelopment profits will benefit from the (currently) attractive UK corporation tax rate, instead of personal income tax rates.

But it is hard to make any kind of case in favour of creating a company to buy and hold residential property that will be used by the shareholder or connected persons. The 15% SDLT charge, ATED and the absence of IHT protection together can make it less appealing.

When it comes to UK residential property that is already held by a company, the question of whether it is preferable to buy the property, or the company can be complex. The scope to avoid SDLT on the purchase is obviously attractive, despite the risks and extra costs involved in buying a company.

Where the foreign domiciled individual elects to buy the company, with the intention of using the property personally, there are usually strong arguments in favour of collapsing the company after the purchase, so that the property is held directly. One of which is the elimination of ATED. However, here too the tax and other considerations can be complex and need to be weighed carefully.