London Purchasing Guide: key tax considerations
Buying a home in London? Know your taxes, says Oryx World Portfolio
You’re a shrewd investor. You know your politics, you understand global economies and, after a market drop, you never presume to know what’s going to happen next.
But, despite your financial savvy, the UK’s tax system is, well, downright confusing. From stamp duty land tax to inheritance tax, what are the key considerations, how do they affect you, the buyer, and to what extent will they affect your investment’s performance? Oryx World Portfolio throws a spotlight on the five main property taxes every overseas buyer should understand.
Stamp Duty Land Tax (SDLT)
SDLT is based on a property’s purchase price. The rate depends on the value of the property being purchased and on whether you are buying a ‘main home’ or not – if you aren’t, you must pay an extra 3% in SDLT since 1 April 2016. For example, if you buy a property worth £1m, SDLT is £43,750 (4.38%) for a main residence, or £73,750 (7.38%) for an additional property. Likewise, for a £1.5m property, you must pay £93,750 (6.25%) if it is a main residence, or £138,750 (9.25%) if it is an additional property. Beware, however, if you purchase residential property indirectly, ie, via a company, and you are not using the property for some kind of commercial activity (eg genuine lettings to third parties), you must pay a flat rate of 15% on purchases worth more than £500,000. Be sure to factor SDLT into your calculations before deciding whether to invest – although a relatively straightforward process, SDLT is a thorn in the side of many investors.
Capital Gains Tax (CGT)
So, too, is CGT, which in April 2015 was introduced for non-UK residents disposing of UK residential property, and applies to sales of UK residential property at 18% or 28%, depending on your tax-paying status. There is an exemption for disposals of main residences but this is usually hard to obtain for non-UK residents. If you purchase property through a company for owner occupation, chances are you’re no better off as you will incur 28% CGT (and on the increase in value since April 2013 in many cases) if ATED (see point 4) applies. CGT is applicable to non-residents, non-resident companies, trustees and estates.
Income Tax
If you buy a property in the UK and rent it out to obtain a revenue stream, be prepared to pay tax on that income. Remember that income tax applies only when a property is rented out, and is payable on net profits, which means that it can often help to obtain a mortgage since mortgage interest payments are currently fully deductible from rental receipts, although for some taxpayers that will change over the next few years
Annual tax on enveloped dwellings (ATED)
ATED is an annual tax that used to be paid mainly by companies owning UK residential property worth more than £1 million. From April 2016, however, much to investors’ dismay, the UK government introduced a new band for properties valued between £500,000 and £1m for which the charge is £3,500. Properties valued between £1m and £2m incur a £7,000 fee while homes worth between £2m and £5m are charged an eye-watering £23,350. This figure rises to a whopping £218,200 for homes worth more than £20m. Thankfully, ATED is only payable if you personally occupy the residence.
Inheritance Tax (IHT)
Last but not least, IHT is hugely important. There is a misconception that you are only subject to IHT if you are domiciled in the UK. This is not true. If you directly own any UK assets but live overseas, those assets are chargeable at the standard rate of 40% above the current nil rate band of £325,000. But you can leave assets to a spouse free of IHT in almost all cases, although you might need a Will to achieve that. Property owned via a company is not currently subject to IHT although the shares might be if a UK company or the shareholder is UK domiciled. However, there is a proposal that from 6 April 2017 UK residential property (but not commercial property) held via non-UK companies will become subject to IHT: further details of this proposal are currently awaited, but anyone holding UK residential property via a non-UK company will need to consider their options later in the year.
What does all this mean for international investors?
Piers Master, a partner at international law firm Charles Russell Speechlys LLP, comments, “The UK Government has introduced a number of changes over the past few years, the overall aim of which has been to align the tax treatment of UK residential property (but, interestingly, not commercial property) so that UK and international individuals are taxed in a similar way.
“It remains sensible – indeed highly important – for all investors into UK property to plan sensibly so as to ensure that they can invest as efficiently as possible,” he adds. “It is also important to be aware that the kind of planning the UK was promoting a few years ago is different from best practice today, so you should always take up to date advice”.
Changes to UK property tax can be implemented at any time and for this reason it’s essential to consult a local law firm or tax specialist for specific legal advice. This article offers general information only and does not constitute legal advice.
For details on the UK’s most exciting investment opportunities, of which there are many, call Oryx World Portfolio today on +971 (0) 4 446 2000.