The United Kingdom has long been an attractive destination for international investors looking to purchase real estate.
From the bustling streets of London to the serene countryside of Scotland, the UK offers a diverse range of investment opportunities. However, non-UK residents should be aware of the tax implications associated with buying property in the country.
This article will provide an overview of the key tax considerations that non-UK resident individuals should keep in mind when investing in real estate in the UK.
Stamp Duty Land Tax (SDLT)
One of the first tax considerations for non-UK residents purchasing property in the UK is Stamp Duty Land Tax (SDLT).
Stamp Duty Land Tax is a tax on land transactions that is, any acquisition of a chargeable interest in land other than an exempt interest.
A chargeable interest is defined as, either:
- An estate, interest, right or power in or over land in England or Northern Ireland;
- The benefit of an obligation, restriction or condition affecting the value of such an estate, interest, right or power.
The purchaser is expressly liable to pay it (section 85, Finance Act 2003).
The tax is levied by reference to the chargeable consideration provided directly or indirectly, by the buyer or by a person connected with him.
Currently and up to 31 March 2024, the applicable rates based on the value of the property are:
|Up to £250,000||Nil|
|from £250,001 to £925,000||5%|
|from £925,001 to £1.5 million||10%|
|above £1.5 million||12%|
For non-UK residents, an additional 2% surcharge on top of the standard SDLT rates is applicable, except for properties under £40,000, or certain types of dwellings like caravans and houseboats.
Furthermore, from 1 April 2016 a supplemental 3% charge applies to purchases of additional residential dwellings in England and Northern Ireland unless the new property is a replacement of the buyer's only or main residence.
The UK imposes on owner occupied residential properties a tax called Council Tax.
The rates are set by each council and the tax applies on the value of the property at 1 April 1991.
Income Tax on Rental Income
One of the reasons to purchase a residential real estate in the UK is private enjoyment when visiting the country.
Another common reason is to have a house available to the children where they can stay while studying at university.
Therefore, many non-UK residents purchase UK residential real estate for investment purposes and rent it out soon after acquiring it.
Rental income is subject to UK income tax.
The applicable tax rate ranges from 20% to 45% depending on the individual's total UK income.
The UK legislation imposes on a UK letting agent, where there is one, or otherwise on a tenant, an obligation to withhold tax at the 20% rate on the rental income before it is paid to an overseas landlord.
A non-UK resident landlord can register with HMRC to the Non-Resident Landlord scheme to receive rental income gross.
Even of this step is taken, a non-UK resident landlord will still be required to file a Self-Assessment tax return to declare income received in a given financial year and pay tax accordingly.
Capital Gains Tax (CGT)
Non-UK resident individuals are subject to UK tax on chargeable gains, (Capital Gains Tax or CGT) realised on disposals of interests in directly owned UK land.
In some cases a non-resident individual is also chargeable to capital gains tax on a disposal of indirectly owned properties therefore in this article we will only consider disposals of directly owned UK residential real estate.
Chargeable gains on disposals of UK residential real estate are subject to tax at the 18% or 28% rate depending if the seller is a basic rate or additional rate tax taxpayer.
Annual CGT exemption may be available and for the financial year 2023/24 the exempt amount is £6,000.
When a property purchased before 6 April 2015 is sold, there are three possible methods for calculating the gain or loss, these are:
- Rebasing to 5 April 2015: a gain or loss is calculated as if the property had been acquired on 5 April 2015 for a consideration equal to its market value;
- Straight-line time apportionment: an election can be made by the seller to time apportion the post-5 April 2015 gain or loss over the total period of ownership;
- Retrospective basis: this method allows to use the historic purchase price and disposal proceeds to calculate the total gain or loss.
Private residence relief may reduce the amount of CGT payable in some cases where the owner or his spouse spends at least 90 days in the property in a tax year.
Following the disposal of a real estate, a non-UK individual seller must submit a non-resident Capital Gains Tax return and pay any tax within 60 days from the completion date.
Inheritance Tax (IHT)
Inheritance Tax is levied on the value of an individual's estate upon their death or on lifetime gifts.
Individuals domiciled in the UK are subject to IHT on their worldwide estate while no- domiciles are subject to IHT only on their UK estate.
A UK real estate is a UK situs asset for IHT purposes and so subject to inheritance tax in the UK regardless of the domicile of the owner.
IHT is not charged on the nil rate band (NRB), the first £325,000 of value but it is charged at the rate of 40% on the value above the NRB of an estate on death.
Individuals who die on or after 6 April 2017 may benefit from an additional residence nil rate band (RNRB) if they leave their interest in the family home to their lineal descendants.
The spouse exemption that allows the transfer or property free of IHT from a deceased individual to the surviving spouse is available, therefore restrictions apply if husband and wife are both either not domiciled or domiciled in the UK.
A surviving spouse or civil partner can also inherit the unused deceased spouse or partner’s nil rate band bringing the total amount exempt from IHT to £625,000.
Some strategies are available to mitigate the possible IHT charge at death.
Investing in UK real estate as a non-UK resident can be financially rewarding, but it also requires a clear understanding of the tax implications involved. SDLT, income tax on rental income, CGT and IHT considerations are crucial aspects that must be carefully managed to ensure compliance with UK tax laws and optimize financial outcomes.
Seeking professional tax advice and staying informed about changes in tax regulations is essential for non-UK residents looking to make sound real estate investments in the United Kingdom.
If you are a non-UK resident individual planning to purchase or sell a UK real estate please get in touch with a member of our team on +442076312061 to discuss how to structure the transaction to minimize any potential tax exposure in the UK.
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