The rising wealth of Asia Pacific nations, including Singapore, means more and more people have looked internationally for opportunities to invest in overseas property markets. Recent stock market events have shown the importance of a diversified portfolio capable of riding out the storm when economic conditions put immense pressure on share values.
The UK has proven popular over the years not only as an investment opportunity but also somewhere to live as a lifestyle choice; either permanently or for mobile expatriates able to afford multiple homes. However, anyone looking to purchase UK residential property should be aware of the existing and forthcoming tax laws surrounding property ownership.
Until relatively recently, overseas buyers, and in particular non-UK domiciled individuals, have been able to structure their property holdings in a highly tax-efficient manner that mitigated the effects of stamp duty, capital gains tax, and inheritance tax. This favourable position has steadily been eroded as the Government seeks to improve tax revenues whilst, at the same time, levelling the playing field for UK resident and overseas property buyers.
In this article we look to highlight some important aspects of UK taxation that apply to foreign investors purchasing UK residential property. Firstly the purchase costs will include legal and estate agents fees as well as stamp duty land tax (SDLT) which on the average London property* means an SDLT charge of about £13,700.
The rental income, once allowable deductions have been taken into account, is taxable. Under the non-resident landlord scheme, the property agent or tenant is responsible for deducting income tax of 20% from the chargeable rental amount and paying this to HM Revenue & Customs (HMRC). The landlord is responsible for paying any additional tax due under the UK Self-Assessment system.
However, the above tax deduction at source can be avoided subject to approval by HMRC and overseas owners will therefore typically apply to receive gross payments whilst remaining liable for the full tax each year at their marginal rate.
The UK has a number of double taxation agreements (DTA) in place that determine which country will tax UK income arising on behalf of someone residing outside the UK. The DTA between the UK and Singapore taxes UK rental income in the UK for a Singapore resident and it should be noted that no personal allowance is available to a Singaporean, resident outside the UK.
With effect from 6 April 2015, non-UK residents owning UK residential property became liable to capital gains tax (CGT) on the sale of that property. This changed the existing law which generally only applied CGT to UK residents.
Nowadays, a non-UK resident will be liable for CGT at either 18% or 28% on the profit arising from 6 April 2015 to the date of the sale. HMRC will use the value of the property as at April 2015 to set its base cost unless the owner elects for a time apportionment method of calculation.
UK Inheritance Tax (IHT) is payable by non-UK domiciles on UK assets valued in excess of the nil rate band (NRB) of £325,000. This means that owning a UK residential property creates a UK estate subject to tax on death at the rate of 40% on its value over the NRB. It has been quite common for overseas buyers to hold UK property in an offshore company to avoid the IHT liability.
From April 2013, purchasing high value residential properties through a company can result in an increased SDLT rate of 15% on purchase. Also, such properties can be subject to "Annual Tax on Enveloped Dwellings" (ATED), as well as CGT at 28% when selling the property. Initially a high-value property was one worth at least £2m, but from April 2016 the threshold will drop to £500,000.
In the Summer Budget 2015, a number of proposals affecting non-UK domiciles were announced, including having to pay IHT on UK residential property held in an offshore trust, company, partnership, and foundation. With effect from 6 April 2017, it will no longer be possible for a non-UK domicile to shelter their UK residential property from IHT by holding it via a company or other structure.
Existing property owners using an offshore company and paying the ATED are recommended to speak with their financial adviser and to consider whether it's appropriate to continue with, or unwind, the arrangement. An option that may be available to Singaporeans now facing an increased liability to IHT is to purchase a life insurance policy for an amount equal to the expected IHT amount.
*Land Registry data published in June 2015 – average London property price is £474,544 (S$1.01m)
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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