UK RESIDENTIAL PROPERTY TAXATION

UK RESIDENTIAL PROPERTY TAXATION

A guide for non-UK company owners

2

This publication is not meant as a substitute for advice on particular issues and action should not be taken on the basis of the information in this document alone.

This firm is not authorised by the Financial Conduct Authority (the FCA). However, we are included on the register maintained by the FCA (www.register.fca.org.uk) so that we can offer a limited range of investment services (including insurance mediation activities) because we are authorised and regulated by the Solicitors Regulation Authority (the SRA). We can provide these services if they are an incidental part of the professional services we have been engaged to provide. Mechanisms for complaints and redress if something goes wrong are provided through the SRA and the Legal Ombudsman.

BDB Pitmans LLP processes your personal data in connection with the operation and marketing of a legal practice and in accordance with our privacy policy at www.bdbpitmans.com/privacy. We will occasionally send you information relating to the firm however if you would prefer not to receive this information or would like us to amend your contact details and/or mailing preferences, please notify us by email: [email protected].

BDB Pitmans LLP is a member of Lexwork International, Eureséau and Interact Law, three associations of independent law firms. www.lexwork.net | www.eureseau.com | www.interactlaw.com.

Printed on sustainable paper.

1

UK RESIDENTIAL PROPERTY TAXATIONProperty tax in the UK can be complicated, especially for a non-UK resident corporate owner. We look at the taxation of rental income where the property is held as an investment and is rented out. We also examine the annual tax on enveloped dwellings and the latest proposals to introduce a CGT change on non-resident owners of UK residential property.

We include useful links to websites as well as details of our expert advisers at the end.

RENTAL INCOME FROM PROPERTYAny income from the rental of UK property is taxable in the UK and must be reported to Her Majesty’s Revenue and Customs (HMRC) on a self assessment tax return. The rental of the property (whether commercial or residential) is treated as income from running a business. If the landlord is a non-UK resident then the landlord will be subject to certain special rules regarding the property rental income which they receive. This is known as the non-resident landlord scheme.

2

3

WITHHOLDING TAX / NON-RESIDENT LANDLORD SCHEMEThere are two possible ways in which the landlord can pay tax on rental income received from the renting of UK property.

DEDUCTION OF WITHHOLDING TAX BY TENANT / MANAGING AGENTThe non-resident landlord scheme has special rules which place an obligation on the management agent who collects the rents, or in the absence of a managing agent, the tenant to withhold tax from the rents paid to the landlord and to pay this amount to HMRC on a quarterly basis. This tax is then available to set against the landlord’s final liability for the year.

REGISTER FOR APPROVAL UNDER NON-RESIDENT LANDLORD SCHEMEAlternatively, the landlord can register to be included in the non-resident landlord scheme which will then allow the landlord to receive the rental income without being subject to the withholding tax as described above. To be included in the scheme the landlord will need to submit an application to HMRC. HMRC will then issue an approval number which will be passed onto the managing agents.

Before issuing the approval HMRC will carry out checks to ensure that the landlord does not have any outstanding UK tax liabilities and all previous returns have been filed and paid by the appropriate due dates.

TAXABLE PROFITTo calculate the profits subject to tax the landlord will be able to deduct certain allowable expenses from the rental income.

The expenses incurred will need to be analysed to determine if they are allowable as a deduction against the rental income. Allowable expenses will include such things as:• managing agents’ fees;• legal fees in connection with

rental of the property;• loan interest costs;• rental / letting agreements;• inventory checks;• repairs;• utilities;

• marketing costs;• ground rents;• service charges;• decorating / gardening; and• 10% wear and tear (if the

property is rented as furnished).

This list is not exhaustive and it is important that all expenses should be analysed to ensure the correct treatment.

Any expense which is not allowable as a deduction from the rental income should be noted as it may be possible to add this to the original purchase price of the property for the calculation of any capital gains tax (if relevant). Examples of such expenses are improvements to the property, extending leases or purchasing freeholds and the costs associated with doing so.

4

REPORTING THE RENTAL INCOME AND PROFITS TO HMRCIf a landlord has received rental income during a UK tax year (6 April to 5 April), they will be required to complete a tax return. The return must be filed and tax paid by 31 January following the end of the tax year, eg year ended 5 April 2014 (2013/2014 return) must be filed by 31 January 2015. The tax return will need to include all the rental income and expenses, which are allowable as a deduction from the income. This taxable income will then be subject to tax at the appropriate rate. In addition to filing the tax return by 31 January following the end of the tax year, any tax due must also be paid by this date. Tax paid late may be subject to interest and penalties.

5

6

ANNUAL TAX ON ENVELOPED DWELLINGSFrom 1 April 2013 a new tax on what are known as ‘enveloped’ properties was introduced. Broadly speaking, this placed a tax charge on any residential property worth more than £2 million which is held through a non-resident company, a common structure for owning London properties, in particular for properties occupied by non-UK domiciled individuals.

The initial annual charge for a property valued at £2 million is £15,000 pa rising to £140,000 pa for properties worth £20 million and above.

This has already increased to £15,400 pa for a property valued at £2 million and £143,750 for properties worth £20 million and above; the amount of the annual charge will continue to increase each year in line with the consumer price index.

There are reliefs available in certain situations although an annual tax return must be filed and any available relief claimed. One of the reliefs is for properties let to third parties, so being in the non-resident landlord scheme should be helpful in demonstrating eligibility for the relief. The return for 2013/14 was the initial year for which a return was required, and as such the time limits for filing the return and paying the charge were different than those which apply from 2014/15. For 2013/2014 the return had to be completed and filed with HMRC by 1 October 2013 and the payment made by 31 October 2013. For 2014/2015 onwards the return and tax must be filed and paid by 30 April.

7

If returns are submitted and / or tax is paid late, HMRC may charge interest and penalties.

Where a property liable to annual tax on enveloped dwellings (ATED) is sold or ownership is changed, there may also be an ATED-related capital gains tax liability to gains arising since 6 April 2013.

HMRC have recently announced that these taxes are to be extended to include property worth more than £1 million from a April 2015 and property worth more than £500,000 from 1 April 2016. The proposed ATED charge in the first year will be £7,000 and £3,500 respectively.

8

CGT ON NON-RESIDENT RESIDENTIAL PROPERTY OWNERSA CGT charge on non-resident owners of UK residential property (including individuals, trusts and companies) is to be introduced from April 2015. The Government’s consultation on this new charge closed in June 2014 and it is anticipated that they will publish their response in the autumn of 2014, with legislation appearing in the 2015 Finance Bill.

The charge – probably in the form of a special ‘tailored’ charge (although the actual rate is to be confirmed) – will apply to non-resident companies (with non-UK resident shareholders) as well as non-resident individuals, trustees, and some other structures who dispose of UK residential property (with no lower value limitation specified) and including let properties (subject to limited exceptions) from April 2015 onwards.

The Government has indicated that the new charge will only apply to gains accruing after April 2015. It is not clear at this stage how these gains will be calculated. We expect further details in the Government’s response to the consultation.

Corporate envelopes that are not genuine businesses disposing of UK residential property will still be subject to the ATED-related CGT charge at 28% and not the new CGT charge. The intention is for the separate CGT regimes to co-exist. UK resident shareholders of corporate envelopes disposing of UK residential property have been taxable for some years.

9

The Government has clarified that non-resident corporates will not generally be subject to the new charge where the company is ‘widely held’ and only ‘close companies’ will be subject to the new charge. It is not clear at this stage what the Government define as a close company for these purposes. Again, we should have further details when the Government publishes its full response to the consultation in the autumn.

10

HOW WE CAN HELPDealing with HMRC can be, and often is, a daunting prospect and professional advice should be sought to ensure that the correct details are provided. HMRC has recently launched a campaign offering landlords the opportunity to put their tax affairs in order.

The campaign gives landlords the opportunity to disclose and settle previous years undeclared or under-declared property income.

As well as assistance in buying and selling property and advising on the pros and cons of the alternative structures which may be used when purchasing property and advising on how to change property ownership, we are able to assist in all dealings with HMRC, including where necessary:• application to be included in the Non-resident Landlord Scheme;• preparation of the annual self assessment tax return;• calculating the tax due and advising on dates when payments

are due;• preparation of the annual ATED return; • advice as to availability of any relief which may be available and

calculation of taxable income from the property; and• advice on any capital gains tax liability.

Our experts are kept up to date with changes in legislation that may affect you. We have acted for numerous non-UK resident corporate purchasers and advised on UK tax liabilities and reporting requirements.

If you are considering purchasing a property in the UK as an investment or to live in, please get in touch with us for a no obligation conversation.

11

WHAT OTHERS SAY ABOUT US...

“Helen Ratcliffe is ‘very bright, a first-class lawyer. She’s very good, she works incredibly hard, she’s very serious about doing a good job’.” Chambers and Partners High Net Worth UK 2018

“Helen Ratcliffe ‘combines a warm personal touch with a sagacity born of her long experience of dealing with wealthy international families.’” Legal 500 UK 2018

“BDB ‘are excellent, one of the best. I think their technical knowledge and experience makes them stand out’.” Chambers and Partners High Net Worth UK 2018

12www.bdbpitmans.com/internationalinsightsblog

13

GET IN TOUCHBDB Pitmans is an award winning, top 60 UK law firm with offices in London, Cambridge, Reading and Southampton. Many of our lawyers and advisers are recognised leaders in their practice areas – their knowledge and expertise helps us to provide a unique, client centred approach to law.

CONTACT DETAILS

Helen Ratcliffe (Partner)T +44 (0)20 7783 3661 E [email protected]

Paul Gallagher (Tax Director)T +44 (0)20 7783 3681 E [email protected]

www.bdbpitmans.com [email protected]

FIND US ON www.bdbpitmans.com/blogs

USEFUL WEBLINKSwww.hmrc.gov.uk/ated/basics.htm www.hmrc.gov.uk/sa/ www.hmrc.gov.uk/international/nr-landlords.htm

© BDB Pitmans LLP 2018T +44 (0)345 222 9222 W www.bdbpitmans.com Cambridge | London City | London Westminster | Reading | Southampton

FIND US ON