The UK, and London in particular, remains a magnet for international investors. In terms of UHNWIs (those with net assets over $30 million), London has the largest population with 4,944 – the most of any city in the world according to Knight Frank’s World Wealth Report 2019.
However, the UK government introduced rules in 2019 that mean the tax cost of buying, owning and selling residential properties in the UK has now increased, particularly for non-residents. The UK tax system is notoriously complex and can prove a minefield to navigate – there are different rules for residential and commercial properties, and these can vary depending on where the owner is resident for tax purposes.
For many years, the UK was seen as an attractive place for foreign investors in property and it was relatively simple for non-residents to legally avoid tax. This was usually achieved by holding the property through a company registered outside the UK, but the advantages of doing so diminished in
April 2013 with the introduction of an annual tax on enveloped dwellings (ATED), which is charged on residential properties valued at more than £500,000 that are owned by certain companies. This tax applies to both UK and non-UK residents and is charged annually based on the value of the property. It was designed to discourage corporate ownership of UK residential properties that are occupied by non-qualifying individuals.
What changed in 2019?
Prior to April 2019, non-UK residents were only subject to UK capital gains tax (CGT) if they sold a UK residential property. There were two forms:
- Non-resident CGT (NRCGT) rules which applied to disposals by non-resident individuals, close companies, trusts and personal representatives.
- ATED CGT rules that applied to disposals by companies subject to the ATED charge.
After 6 April 2019, the following changed:
- The NRCGT regime was extended beyond residential property and non-UK residents are now subject to UK tax on the disposal of all types of UK property, including land and commercial property (known as immovable property).
- The ATED-related CGT regime was abolished completely and companies making disposals of UK property are now subject to corporation tax instead.
- An indirect CGT charge was introduced on disposals of shares in ‘property rich’ companies, which derive at least 75% of their value from UK land.
The abolition of ATED-related CGT presents a tax benefit for companies disposing of UK residential property in the future, as ATED-related CGT gains were charged at the rate of 28%, while the current corporation tax rate is 19%, and will reduce to 17% with effect from 1 April 2020.
What tax is due?
Non-residential properties and shares of property-rich companies affected are automatically rebased to their 6 April 2019 market value (unless an election is made to use the original acquisition cost), so only the increase in value since April 2019 will be subject to tax. This means companies will need to obtain a valuation of their relevant properties as at 5 April 2019.
Gains realised on the disposal of a UK residential property remain subject to tax in respect of any increase in value since April 2015.
The table below shows a breakdown of the current tax rates on UK property disposals (June 2019):
|Residential Property||Commercial Property||Stocks and Shares|
|Individual||28% (18%)||20% (10%)||20% (10%)|
The figures in brackets are for basic rate individual taxpayers.
UK rental income changes
UK rental income received by a non-UK resident company is also changing. It is currently subject to income tax at the basic rate (20%). However, under new changes to be introduced in April 2020, non-resident property holding companies will fall into the corporation tax regime, which means UK rental profits will then be taxed at 17%.
What action do you need to take?
These changes are intended to simplify the previous legislation and align the UK more closely with other countries. They also remove the remaining advantage that non-residents had over UK residents investing in UK residential property, although UK commercial property advantages do still exist. If you are a non-resident owner of UK property, either directly or through trusts and companies, these new rules will affect you and your tax position. Nedbank Private Wealth does not provide specialist tax advice, but it is important to take appropriate advice in relation to your individual tax circumstances.
Nedgroup Trust is wholly owned by Nedbank Private Wealth and we work closely together to provide end-to-end wealth services to our private and corporate clients. As part of an international group, we have expertise in a variety of jurisdictions to cater for varying client needs. To find out more about our international trust and company services, please complete the form below, or contact your private banker or our client services team on +44 (0)1624 645000.
We hope you enjoyed this article
Marcus has 28 years of experience in the management of private client wealth, including 12 years at a major private bank providing a diverse range of banking, investment and estate planning services. He has focused on the provision of trust and related services at Nedgroup Trust since 2001. Marcus became a director in 2013 and is a member of the Society of Trust and Estate Practitioners.