The UK real estate market in particular the residential market, continues to attract foreign investors. However, fiscal reforms over the past few years specifically targeting UK residential properties have made such investments less enticing from a UK tax point of view. To reaffirm this, the UK government has recently announced that, as of April 2021, non-UK residents will be subject to a 2% surcharge on Stamp Duty Land Tax (‘SDLT’).
Foreign investors who are looking to invest in the UK residential property market should carefully consider how to structure such investment – whether to make it via a corporate vehicle or in one’s own name. There is no single approach and the solution differs considerably depending on personal circumstances and objectives.
In principle, if a property is being purchased for one’s own personal use and enjoyment (rather than for rental purposes), it would be advisable for the purchase to be in one’s own name. If there are any children, one could consider co-owning the property with the children from the outset in order to mitigate potential UK inheritance tax consequences. Individual ownership would also mean that the property was not subject to the Annual Tax on Enveloped Dwellings (ATED) introduced in 2013, which imposes a tax from £3,700 to £230,000 per year depending on the value of the property.
By contrast if a foreign investor wishes to purchase a UK residential property with the objective of renting it out to tenants then it is certainly worth exploring the possibility of making such an investment via a corporate vehicle. In such circumstances, ATED would not be applicable and, in principle, it would also be possible to deduct certain expenses (for example, interest payable on a mortgage) which would significantly reduce the company’s overall tax liability.
From a tax perspective, this subsequently raises the question as to whether it is more efficient to utilise a UK incorporated company or a foreign (non UK) company (for example, an existing foreign holding company) or a combination of the two.
With effect from 2019, there has been an alignment on the taxation of UK companies and foreign companies holding UK residential property with regard to direct taxes (i.e. income and capital gains tax) – in both circumstances, any income or capital gains on subsequent disposals would be subject to UK corporation tax (currently at 19%). Therefore, the choice between a UK or foreign (non UK) company would be, from this perspective, irrelevant.
This choice may, however, have a significant impact from a UK inheritance tax standpoint. Shares in a UK incorporated company held by non UK domiciled shareholder are subject to UK inheritance tax (at 40%). From 2017, shares in foreign companies which hold, directly or indirectly, UK residential properties are also subject, in principle, to UK inheritance tax (chargeable on the value of the shares which is attributable to such properties). However, if the UK residential property is owned (directly or indirectly) by a foreign (non UK) company and the shareholder is resident and domiciled in a country with which the UK have has entered into a double tax treaty on estate duties, on the shareholder’s death it may be possible, in reliance on the relevant Treaty, to override the 2017 IHT rules so preventing a UK inheritance tax charge from arising. The UK has a limited number of estate double tax treaties (for instance with Italy, France, India, Pakistan, Sweden, South Africa, Switzerland, United States) – but where the investor is potentially subject to estate duties (or equivalent charge) in any of these countries, the Treaty may offer protection from a UK inheritance tax charge.
A dual structure (i.e. with the UK residential properties being purchased by a UK company established as a 100% subsidiary of a non UK family holding company) could potentially provide even further benefits. Any income and capital gains generated in respect of the UK residential properties would only be taxable in the UK (without having to take into consideration any tax credit – as would be the case if the company was incorporated and tax resident in a different jurisdiction). The UK company could distribute dividends to the non UK resident parent company with no withholding tax in the UK. Furthermore, as the purchaser would be UK resident for tax purposes, a UK company would not be subject to the 2% SDLT surcharge (which will apply from April 2021 to non UK resident purchasers). If two or more properties were to be purchased concurrently (i.e. in one single transaction), it would also be possible to explore options which could significantly reduce the SDLT payable at the time of purchase.
In any case, it would be necessary to liaise with foreign tax advisors in order to fully understand the various ramifications from a foreign tax perspective. As it is often the case in cross-border matters: the devil is in the detail!