UK Property Purchase Taxes

Jon Property Taes.jpg

Tax adviser Jon Golding checks out the London Battersea Power Station development

The United Kingdom (UK) press now says that 95% of the first phase of the Battersea Power Station Development in London has been pre-sold to overseas investors from Asia. Clearly, London property continues to be an attractive investment opportunity for overseas purchasers, with a buoyant rental market and an undervalued sterling currency. Jon Golding, a UK qualified tax mitigation expert and author of numerous tax planning books, says “…those investing in UK property must appreciate there are price tags attached to a purchase including stamp duty, inheritance tax and income tax on the rents. It is important to understand what these are before committing a large investment of this sort.”

Jon suggests the following factors must be considered before buying property in the UK:

  1. Stamp Duty Land Tax is imposed on the purchaser where the cost of the property is in excess of £125,000.
  2. Income Tax deductions at 20% on net rental income under the non-resident landlord scheme.
  3. Capital Gains Tax on sale at 18% and/or 28%.
  4. Inheritance Tax at 40% on death imposed on all UK situated assets for foreign domiciled individuals where the value of the property exceeds the £325,000 nil rate band.

 

Stamp duty

Stamp Duty Land Tax (SDLT) is payable by purchasers of UK property in excess of £125,000, which means paying anything between 2% and 15% for properties over £500,000 and above (typical in London). Recent UK legislation has closed existing avoidance loop holes and non-residents living abroad will pay an extra 3% on top of the standard rate. Anyone transferring properties into offshore companies and trusts should also be aware of the new rules, which can result in up to 15% stamp duty and an annual tax on enveloped dwellings charge, if the property is not commercially let.

Rental Income (Income Tax)

Rents need to be collected; it is imperative to have an experienced letting agent with knowledge of the needs of an overseas investor. Trying to manage the property rents oneself is a false economy. A good agent will normally charge between 10-15% of gross rents, but will ensure that rental income is collected and void periods are limited, cover defaults with insurance and ensure maintenance upkeep costs are kept to a minimum. A good agent will also ensure that income tax payable on net rents of 20% is accounted for to the UK Revenue.

Capital Gains Tax (CGT)

A sale of the property by a non-resident should be notified within 30 days of the sale to the UK’s Revenue & Customs. Also, a calculation of the gain and the tax payable must also be notified or there will be penalties and interest payable. It is important to get a tax accountant to do the calculations, as they will be able to claim the allowable deductions to reduce the gain. These new rules are complex and need to be monitored with care, otherwise a sale could result in a maximum charge of 28% on the gain.

Inheritance Tax (IHT)

This is by far the worst potential tax implication for foreigners investing in UK property, because a tax rate of 20% for certain lifetime gifts of property or 40% on death will be imposed. Under UK tax legislation foreigners owning any UK property are not excluded from this tax, as UK situated property is always taxable at the rates mentioned. This can catch many purchasers out!

When buying or holding UK property in your portfolio of investments, Jon offers the following action plan:

  • Target for higher capital growth and/or rental income, e.g. London and South East England vs Central and Northern England.
  • Appoint a solicitor and letting agent who are respectively familiar with drawing up purchase agreements for non-domiciles and non-resident landlord rental withholding tax.
  • Ensure UK tax and will planning is in place to cover the tax payable when the foreign owner passes on his UK situated assets, so that these are passed on to beneficiaries free of the 40% IHT charge.
  • Don’t pay the higher stamp duty charge that applies to ‘enveloped’ dwellings, e.g. property owned through an offshore company.
Case Study

Mr Wong living in Asia wants to invest £1 million in a London property for capital appreciation and rental income.

The purchase of a London property would give capital appreciation of about 6% p.a., but incur a stamp duty charge of £73,750.

Rent on the property could be expected to be upwards of £2,500 per month net. The net rents received on the London property will be taxable at 20% after allowances. Tax of £3,700.

Mr Wong passes on three years later leaving the London property now valued at £1.2 million to his son. No SDLT is payable where property is transferred by Will to his son. However, the tax liability on his demise will be £350,000, (£1.2 million – £325,000 x 40%), payable within six months of his death.

 

 

Taxes due on a £1,000,000 London property will be:

1.    Stamp duty of £73,750 on purchase

2.    Income tax of £3,700 on the rents each year

3.    Capital gains tax on sale at 18% and/or 28%

4.    Inheritance tax on death of £350,000

 

 

 

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