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Investors from the GCC have historically been big in the UK property market, but the recent general election created uncertainty with threats of a mansion tax from some political parties. Now that the Conservatives have formed the new government, we look at some of the UK tax implications for GCC investors who own property in the country.
When a house or flat is bought in the UK, Stamp Duty Land Tax (SDLT) has to be paid. The rate depends on the purchase price, however, any amount in excess of £1.5 million (around Dh8.59 million) will be charged with 12 per cent tax with the remainder of the price charged at lower rates.
SDLT is charged at a higher rate of 15 per cent for residential property valued at £500,000 or more, which is bought through a company or other structures.
For a UK house or flat owned directly by a GCC investor, the annual taxes payable will be minimal. There is a council tax chargeable depending on the rateable value of the property. The level of tax payable is also based on the location of the property, and it is not necessary that the wealthiest areas have the highest rates. But the highest amounts payable at present rarely exceed £3,000.
At the time of the general election several parties proposed the introduction of a mansion tax for property valued at over £2 million.
However, the Conservative Party opposed the introduction of such a tax so it looks unlikely in the foreseeable future.
Rather than purchase residential property in their own names, many GCC investors prefer to buy through non-UK resident companies or other arrangements. This helps address privacy concerns as the investor does not appear on the records of the UK land registry.
In 2013, a new tax called the Annual Tax on Enveloped Dwellings (ATED) was introduced amid concerns that non-residents were avoiding UK tax by acquiring property through various corporate structures.
ATED currently applies to UK residential property worth more than £1 million held through corporate structures.
The tax is charged annually and calculated based on the property’s value as of April 1, 2012 or its subsequent purchase price.
For real estate in the £1 million-£2 million range, ATED is charged based on the value of the property as of April 1 of this year or its subsequent purchase value. Property will need to be revalued every five years to ensure that the correct ATED is paid.
From April 1, 2016, a new charge will be introduced for property in the £500,000-£1 million band with a charge of £3,500. It will be calculated by referencing the value of the property on April 1, 2016, or its purchase value thereafter.
ATED will not be payable if the property is let to a third party on a commercial basis and not occupied (or available for occupation) by anyone connected to the owner. If the property is let, a GCC resident owner will be subject to UK income tax on the rent (less allowable expenses such as letting agent fees, insurance, etc.) at rates of up to 45 per cent.
In some circumstances tax will be deducted from the rent before it is paid to a nonresident property owner. If the property is held through a corporate structure, the company will be subject to tax at 20 per cent on the rental income.
One big change to the UK tax regime for non-residents, which came into force on April 6, is that a non-resident owning UK residential property will be subject to the capital gains tax (CGT) when it is sold.
For those who already own realty, there are different ways to calculate this. The standard approach is to calculate the gain that has arisen over the property’s market value as of April 5. To adopt this approach, you’ll need to obtain a valuation of the property as of the date or its sale value thereafter.
Alternatively, you can either apportion the gain over the whole period of ownership to calculate the gain arising from April 5, or use the original cost, depending on which gives the most favourable result.
The CGT will be levied on both owner-occupied property and those that are rented out to third parties. Individuals will be charged at either 18 per cent or 28 per cent, depending on their other UK taxable income, but all qualified individuals should be able to benefit from the CGT annual exemption (currently £11,100).
Any capital losses arising from the sale of UK residential property will be ring-fenced and only offset against any gains arising from the sale of other UK residential property, either in the same year or carried forward to later years.
All non-residents regardless of whether they file a UK tax return or not will need to submit a Her Majesty’s Revenue and Customs form within 30 days of the sale, stipulating the gain or loss from the transaction.
Those who file tax returns can defer payment of any resultant tax until January 31 following the end of the tax year in which the transaction was made. Otherwise, the CGT will be due within 30 days.
For UK residents, no CGT charge arises upon the sale of an individual’s main residence. Non-residents can only benefit from this relief if they spend at least 90 days living in the property in a tax year.
Individuals who own UK residential property via a corporate structure may be subject to an ATED CGT, which takes priority over the normal CGT.
Property that falls under the ATED umbrella, regardless of whether it benefits from a relief or not, will be charged CGT at 28 per cent on the increase in value of the property as on April 1, 2012, or the purchase price on a later date.
In the event of death
A non-resident and non-domiciled individual who dies owning UK property will be subject to inheritance tax (IHT) on all UK assets, including residential property. The rate is 40 per cent, but there is a nil rate band, which is currently £325,000.
However, IHT can be avoided if the property is purchased through an offshore company, but, as previously mentioned, this can attract other tax implications.
For GCC residents investing directly in UK commercial property, the tax consequences may be broadly similar, but there are some differences. In contrast to residential property, the sale of commercial property does not attract CGT. SDLT is due on commercial property purchase at rates up to 4 per cent.
There is no equivalent ATED for such a purchase through a corporate or other structure. In fact, this can be an attractive way to hold commercial property as it can be sold using company’s shares, rather than the property, resulting in stamp duty of 0.5 per cent rather than SDLT of 4 per cent.
Business rates are payable annually for commercial property. They’re usually paid by the occupier, so for let property, the fees should not be borne by the owner.
New commercial property acquisitions are subject to value-added tax (VAT) of 20 per cent. Acquisitions of second-hand property will only be subject to VAT if the seller has opted to tax. The VAT should be recoverable if the property is let and the owner ticks the option to tax.
Commercial property may be held through a fund structure. Its tax consequences will depend slightly on the vehicle used, but in a tax-transparent structure, it will broadly be as we have outlined above.
The best way to own UK property will depend on your personal circumstances as one solution does not fit all. While there are tax savings with each method, there are pitfalls too. Therefore, tax advice, which takes into account all the different variables, must always be sought to determine how UK property should be held.
Source: Ian Anderson, Special to Property Weekly
The author is a Senior Consultant at Pinsent Masons, an international law firm.
Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided