An overview of tax considerations for non-UK residents purchasing UK residential property

As international travel opens up, it's anticipated that there will be renewed interest in the UK real estate market from non-UK resident purchasers. In this series of articles we will consider some of the legal and tax issues that non-residents should be aware of when buying property in England. This first article focuses on tax issues when purchasing property for personal and family use. Subsequent articles will address tax in relation to buy-to-let properties and non-tax considerations including succession planning.

The key point to take away from this article is that UK tax in relation to UK residential property can be complex and advice should be taken before starting the purchase process. In the majority of cases, due to the tax implications, where property is being purchased for personal occupation by the owner and their family, personal ownership is likely to be the preferred option, rather than ownership through a trust and/or company structure. There may be exceptions to this where other factors, such as succession planning or asset protection, are the key drivers, and the position should be looked at in the round.

Tax on purchase

The key tax to be considered when purchasing a property in England is stamp duty land tax (SDLT). SDLT is charged at progressive rates, with lower rates of tax being applied to the first portion of the purchase price and progressively higher rates across the different portions of the purchase price.

For non-UK residents, there are two key provisions which can increase the rates (across all bands):

• Additional property supplement of 3%; and
• Non-resident SDLT surcharge of 2%.

The additional property supplement applies if the purchaser owns a residential property anywhere else in the world (not just an existing property in England). If the new purchase is to replace an individual’s main home which is being sold at the same time as the purchase (or within 3 years of the new purchase) then the additional rate will not apply: but for non-UK residents who intend to remain non-resident this exception will rarely apply. As most non-UK residents own another property somewhere else in the world, the 3% surcharge nearly always applies.

The non-resident surcharge of 2% is payable when a non-UK resident purchases residential real estate in England. The test for residency for SDLT purposes is different to the standard test for UK tax residence. For individuals, an individual is UK resident (and so the 3% surcharge will not apply) if they have been present in the UK on at least 183 days during any continuous 365 day period that:

• begins with the day 364 days before the effective date of the chargeable transaction; and
• ends with the day 365 days after the effective date of the chargeable transaction.

The below table sets out the standard rates of SDLT on residential property and shows the effect on rates of both the additional property and non-resident surcharge applying.

As the above table shows, SDLT liabilities can become significant. For example, for a non-UK resident who owns another property abroad, the purchase of a property in England for £3m will result in a SDLT liability of £423,750. A £10m property would result in a SDLT liability of £1,613,750. 

The tax must be paid within 14 days of completion of the purchase and consideration as to how the tax will be funded should be considered at the outset. 

If the property is purchased by a non-UK resident company and the purchase price is in excess of £500,000, a flat rate of 17% will apply to the entire purchase price. Again, specific rules apply for SDLT purposes to determine whether a company is non-UK resident.

Tax during ownership

Council tax will be payable throughout the period of ownership. This tax is paid to the local authority in which the property is situated and the level of tax varies depending on the local authority and the value of the property.

If the property is owned by a corporate entity, is worth more than £500,000 and is used by the shareholder of the corporate (or connected family members), the annual tax on enveloped dwellings (ATED) will apply. This is an annual tax, payable in April. The rates for the 2022/23 tax year are set out below. The impact of ATED, plus the inheritance tax regime discussed below, mean that, as a general rule, where a property is to be used personally by the owner, direct ownership in personal name, rather than through a corporate entity or a trust structure is likely to be the most tax-efficient option. ATED does not apply where a property is owned directly by an individual, or directly by the trustees of a trust.

Tax on sale

If a gain is realised when a non-UK resident sells a UK residential property, that gain will be subject to non-resident capital gains tax (if the property was owned by an individual or directly by trustees of a trust) or corporation tax (if the property was owned by a corporate). The current top rate of capital gains tax for individuals on the disposal of residential real estate is 28%. The current rate of corporation tax is 19%, but this is scheduled to increase to 25% from April 2023.

Where the owner is not UK resident it is unlikely that principal private residence relief will apply to exempt the gain from tax.

If the property was owned prior to 2015, rebasing may apply so that only the gain which has accrued since that date may be chargeable.

If the property is owned by a company and the shares in the company are sold, the shareholder may be subject to non-resident capital gains tax on the increase in value of the shares. If the company was owned prior to 2019, rebasing may apply.

Tax on death

If the owner of the UK property dies whilst owning it, UK inheritance tax may be payable. This is regardless of where the owner was resident or domiciled. There is a nil rate band for inheritance tax of £325,000 and above that the rate of tax is 40%. There are exemptions and reliefs which may apply, the key one being where property passes to the deceased’s spouse or civil partner. As will be discussed in a subsequent article, it is essential to make a Will to ensure that if the owner wants the property to pass to their spouse on death, it does in fact do so. In the absence of a Will, the UK intestacy rules will apply and, depending on the deceased’s personal circumstances, the spouse may well not inherit the entire property.

Since 2017, owning a UK residential property through a non-UK incorporated company no longer provides protection from inheritance tax. To the extent that the value of shares in a non-UK company derive from UK residential property, the shares will be subject to inheritance tax on the death of the shareholder.

If the property and/or company is owned within a trust structure, the trust will be subject to inheritance tax charges at a maximum rate of 6% every 10 years on the value of directly held UK real estate or the value of shares that derive their value from UK residential real estate. In addition, if the settlor of the trust is a beneficiary, there could be an inheritance tax liability for their estate, at a rate of 40%, on the value of the trust property deriving from UK residential real estate, under the “gift with reservation of benefit” ('GROB') rules. 

The 6% ten yearly charges and the GROB rules may both apply, leading to two separate inheritance tax regimes applying to the same trust. For this reason, owning UK residential real estate through a trust structure is often not appropriate where the settlor wishes to be able to use the property.

For many non-UK residents, now that a corporate structure no longer provides any protection from inheritance tax, owning through a corporate structure is not the preferred option. Ownership through a non-UK company will result in higher rates of SDLT on purchase, plus ATED being payable on an annual basis and those additional costs, combined with the lack of inheritance tax protection, mean that personal ownership is often preferred.

There are various ways that inheritance tax may be mitigated including:

1. As noted above, making sure the owner has a Will covering UK assets and considering making use of the spouse relief from inheritance tax, if appropriate.
2. The use of debt to purchase the property. The rules regarding deductibility of debt for inheritance tax purposes can be complex. The timing of when the debt was taken out is key: the debt should be used to purchase, maintain or enhance the property, so if the debt is taken out after the event and secured against the property but the borrowed funds are used outside the UK, the debt may not be deductible. Ideally, the debt should be secured against the property. Debts from family members or related trust structures can be problematic as the benefit of the debt can cause inheritance tax issues for the creditor. Commercial third party borrowing secured against the property at the outset is the preferable option, but advice should be taken on this point.
3. Co-ownership may be considered between different family members. If one family member dies, the inheritance tax liability should only be on the deceased’s portion of the property. There can be technical points to consider here, particularly where one family member is funding the other family members’ shares and again, advice should be sought.
4. Use of life insurance to insure against the inheritance tax risk.

In summary, the tax position on the purchase of UK residential property by a non-UK resident can be complex and advice should be sought in advance of starting the process, to ensure that the correct ownership structure is put in place from the outset.