British expatriates tend to prefer to keep hold of UK property, whether for sentimental or investment reasons. But many are not aware of the full tax costs involved today, including increased stamp duty, higher council tax and new liability for non-residents for capital gains and inheritance taxes.
The common theme for many expatriate UK nationals has been to invest in UK real estate. The inexorable rise in values, and solid rental yields has meant UK property has proven to be a strong performing investment class.
However, over recent years the tax burden has generally increased for property owners, and in particular non-residents. In fact, the UK has recently gained the dubious honour of having the highest property taxes in the developed world, boosting Treasury coffers by over £80 billion in the last tax year.
Clients who have UK property need to understand the ever increasing tax cost of this investment class.
Capital gains tax
Before April 2015, generally expatriates did not attract UK capital gains taxes. Now, non-resident individuals and trusts with UK residential property are liable for ‘non-resident capital gains tax’ (NRCGT) of 18% or 28% on growth accrued since 6th April 2015. After selling a UK residential property, even if no tax is due, non-residents have 30 days to file a NRCGT tax return to avoid penalties.
Next year, non-residents disposing of interests in commercial UK property will also face capital gains tax for the first time. From April 2019, NRCGT is due to be charged on the sale of any UK real estate or land, whether owned directly or indirectly (excluding Scotland), based on the revalued amount as at April 2019.
Annual tax on enveloped dwellings (ATED)
The ATED regime applies to UK residential properties not directly held by an individual or trust – for example, those owned or part-owned by a company, collective investment scheme or partnership (where one of the partners is a company). Implemented in 2013 to apply to ‘enveloped’ properties worth over £2 million, in April 2016 the valuation band dropped to £500,000. Rates for the current chargeable period start at £3,500, peaking at £220,350 for properties worth £20 million+.
Enveloped dwellings worth over £500,000 also attract an ATED-related capital gains tax of 28% on gain accrued from April 2013, unless relief is available. ATED rules override both the NRCGT and corporation tax regimes, so a company-owned property, for example, would be liable for 28% ATED-related capital gains tax, instead of the current 19% corporation tax rate.
With these changes, holding UK property through a company has become much less beneficial. The former UK inheritance tax benefits of keeping property within a corporate structure have now also disappeared.
No tax relief is available for ‘de-enveloping’ property, so if a client owns UK residential property within an enveloped structure, they need to understand their options and associated costs.
Since 6th April 2017, UK residential property owned through certain offshore structures has fallen within the charge to UK inheritance tax. The changes have particularly affected ‘excluded property’ trusts owning, directly or indirectly, residential property in the UK. Thus a non-UK domiciliary who, for example, holds a UK residential property through an offshore company, should consider restructuring to avoid an unexpected 40% inheritance tax bill on death, in the same way a UK domiciled individual would. This applies to UK residential property of any value, whether occupied or let.
Stamp duty land tax
Only first-time buyers benefit from the 2017 Budget’s £300,000 stamp duty relief and 5% rate on property purchases up to £500,000. For everyone else, the £125,000 threshold remains, with rates up to 12%.
A 3% stamp duty surcharge still applies when purchasing additional UK residential properties, such as second homes and buy-to-let properties, bringing the top rate to 15% (for properties over £1.5 million). Overseas properties should be included, so if a client lives overseas in a property they own, buying another in Britain – even if it is the only UK property – could subject them to additional stamp duty.
Stamp duty land tax no longer applies in Scotland; instead you pay a transaction tax. From April 2018, Wales also introduced a transaction tax to replace stamp duty land tax.
Anyone who holds unoccupied UK property may have seen their council tax rates double in April, when local authorities gain the option to increase council tax premiums by 100% on properties vacant for two or more years.
Reduction in buy-to-let tax relief continues. Before April 2017, landlords were able to claim tax relief on their monthly interest repayments at the top level of tax they pay – a tax saving of 45% for higher earners. Up to 6th April, landlords could only claim 75% of mortgage interest relief against the income, then 50%, eventually whittling down to zero by 2020/21. S&P Global Ratings estimates that 60% of recent buy-to-let loans will consequently become loss-making as profits fail to outweigh expenses.
Establish your options
Many expatriates understandably want to retain their UK home, but the increasing tax liabilities need to be carefully considered, especially on second and subsequent properties.
British expatriates can benefit from speaking to an adviser with in-depth knowledge of the tax regimes of both the UK and domestic tax regime to ensure they hold all of their assets in the most tax-efficient way possible. Doing so can also present opportunities that may offer much better tax advantages and returns than UK property.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.