For British expatriates, it may seem like financial sense to keep hold of your house in the UK. However, recent changes have generally increased the tax burden for owners of residential properties in the UK.
For British expatriates, it may seem like financial sense to keep hold of your house in the UK. However, recent changes have generally increased the tax burden for owners of residential properties in the UK.
If you have UK property, it is important to understand what has changed and how you might be affected.
Capital Gains Tax
This April, the rates of UK capital gains tax decreased by 8%… except for residential property. If you are a UK resident, you will still pay 28% or 18% on any chargeable gains made on your residential property.
For non-resident individuals and trusts, capital gains charges were introduced for the first time last year. Now, if you are not a British resident, you will pay Non-Resident Capital Gains Tax (NRCGT) when selling your UK residential property. However, only the gain accruing from 6th April 2015 will be taxable. While commercial properties are not affected, if properties are of mixed use, a just and reasonable apportionment may be made.
Where a property is not held directly by the individual or trust, the NRCGT rules will be overridden by the Annual Tax on Enveloped Dwellings (ATED) regime, which began on 1st April 2013. So if a property falls into ATED before 6th April 2015, gains will be calculated from the date the property became subject to ATED.
Annual Tax on Enveloped Dwellings (ATED)
If you hold a UK residential property through an ‘envelope’ – for example, a company, collective investment scheme or partnership – you are liable for the Annual Tax on Enveloped Dwellings. This has been in place since 2013 for properties worth over £2 million, but from April 2016 it applies to properties valued from £500,000.
With the average house price in London being £530,000, ATED is likely to now apply to a large proportion of properties owned by companies in the capital and many more besides. ATED rates range from £3,500 to £218,200 for properties worth over £20 million.
The ATED-related capital gains tax threshold also dropped to £500,000 in April. Although this targets companies, the rate is 28% instead of the usual (lower) corporation tax rate. ATED-related gains rules have priority over the corporation tax regime as they do with Non-Resident Capital Gains Tax.
With these changes, holding a UK residential property in a company is becoming less attractive. While for many people it made sense to keep their property within a corporate structure because of the UK inheritance tax benefit, this is also now being lost.
Inheritance Tax
From 6th April 2017, the government intends to bring all UK residential property held directly or indirectly by a foreign domiciliary into the firing line for inheritance tax. If this change goes through as planned, non-residents owning UK property – including through a company or other envelope – will pay inheritance tax on the property in the same way a UK domiciled individual would. This will apply to all UK residential property regardless of value, whether it is occupied or let.
Principal Private Residence relief (PPR)
New rules have restricted the availability of Principal Private Residence relief (PPR) for both non-UK residents with property in the UK and UK residents with a property abroad.
From 6th April 2015, your property generally only qualifies for PPR relief if it is located in a territory in which you are tax resident. However, you may be eligible for relief if you spend a minimum of 90 days in the property within a tax year. If either of these conditions are not met, the tax year is treated as a period of absence, so no relief is available.
Stamp Duty
On 1st April 2016 there was a 3% increase across the range of rates of Stamp Duty Land Tax (SDLT) for purchases of additional UK residential properties, such as second homes and buy-to-let properties. The highest rate is now 15% of the purchase price for properties over £1.5 million. This only applies to purchases in England, Wales and Northern Ireland, with a different but similar tax applicable in Scotland.
There are, however, no ATED-related changes to Stamp Duty Land Tax, so if you hold a UK property within an envelope structure you will still pay the 15% rate.
Why pay more than necessary?
As always, it is important to be properly informed about your tax liabilities by seeking professional guidance. British expatriates should speak to an adviser with in-depth knowledge of the tax regimes of both the UK and their country of residence.
A good adviser can ensure that you hold all of your assets in the most tax efficient way possible. They can also talk you through opportunities in your country of residence that may offer much better tax advantages and returns than your current 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; an individual is advised to seek personalised advice.
Any questions? Ask our financial advisers for help.
