UK Property Tax for Overseas Investors
The UK property market remains a popular choice with overseas buyers, boosted by its reputation as a stable investment market with the potential for incredible returns. This means that for many investors in different countries, it’s important to understand how the tax system impacts those abroad.
There have been several changes to tax law recently and any investor, whether based in the UK or overseas for the first time, would be advised to seek specialist help on any property tax matters.
Tax On Purchase – SDLT
Stamp Duty Land Tax (SDLT) is a tax on properties bought in England and Northern Ireland. SDLT is applied on any residential property purchase over £125,000 and is a legal requirement. The tax is different if the property is in Scotland or Wales and there are different rules depending on your personal circumstances.
Basic Stamp Duty Rates and Thresholds
In April 2016, it was announced property buyers would pay an additional 3% on each stamp duty band for second homes or properties bought for Buy-to-Let purposes. Below you’ll find the 2018 stamp duty rates from Gov.uk.
|Band||Normal Rate||Additional Property|
|less than £125k||0%||3%*|
|£125k to £250k||2%||5%|
|£250k to £925k||5%||8%|
|£925k to £1.5m||10%||13%|
|rest over £1.5m||12%||15%|
*An additional property purchased for less than £40k will attract 0% tax. For purchases from £40k to £125k the rate will be 3% on full purchase price.
- Rate applies to that portion of the purchase price.
- Properties up to £40,000 are exempt from stamp duty.
- Properties between £40,000.01 & £125,000 will be charged stamp duty on the full purchase price.
When do I pay Stamp Duty?
You have 30 days to pay Stamp Duty Land Tax from the date of completion or you risk a fine. Remember, legally, it’s your responsibility to ensure this is paid on time. Always maintain your due diligence and ensure it’s being taken care of immediately after completion.
Who is exempt from paying Stamp Duty?
It’s a criminal offence to evade stamp duty, although there some exceptions:
- You’re a first-time buyer purchasing residential property for £500,000 or less, as long as it’s occupied as the main residence. This SDLT relief is also extended to first-time buyers purchasing through approved shared ownership schemes, who pay SDLT in stages.
- No money or payment changes hands for a land or property transfer
- Property is left to you in a will
- Property is transferred because of divorce or the dissolution of a civil partnership
- You buy a freehold property for less than £40,000
- You buy a new or assigned lease of fewer than 7 years, as long as the amount you pay is less than the residential or non-residential SDLT threshold
Tax During Ownership – Income Tax
UK income tax is charged on rental income arising from UK property. When the property is owned and held by an individual, the income tax rate at the time is applicable. The current highest at the time of writing was 45%.
Non-UK resident companies pay income tax at a rate of 20% on any UK rental income, while UK companies instead pay corporation tax which currently sits at 19%. From April 2020, non-UK resident companies will also be subject to corporation tax instead.
Non-Resident Landlord Scheme
As an overseas investor, you need to ensure you register to pay income tax under the Non-Resident Landlord Scheme.
For Buy-to-Let landlords, this works differently for tax purposes and means a non-residential landlord pays income tax on rental profits in the UK, rather than paying income tax in the country they’re based. To be classed under this scheme, the landlord (individuals, companies and trustees) must live outside of the UK for at least six months. In partnerships, each person is considered a separate landlord.
Tax On Sale – Capital Gains Tax
Capital Gains Tax (CGT) is charged to all foreign owners of UK residential property, whether it’s held by an individual, through a trust or a company. It is calculated by the increase in the value of the property, otherwise known as the ‘capital gain’.
The rates of CGT are 18% or 28% for individuals (depending on UK income), 28% for trustees and 20% for companies.
Overseas investors have the option to claim relief from CGT where the property is occupied as their main residence. To qualify for this, the investor should live in the property for at least 90 days in a single tax year. For every tax year that the individual satisfies these criteria, the gain on the property is exempt from CGT. By residing in the property for 90 days, the individual does risk becoming a UK tax resident which can mean extra costs.
From April 2019, it is proposed that the CGT charge on UK residential property will be extended to non-resident companies.
Tax On Death – Inheritance Tax (IHT)
From April 2017, all UK residential property became subject to inheritance tax on the death of the owner. Upon death, the value of UK property will be subject to IHT at 40%. Property held in a trust whether directly or indirectly is exposed to IHT.
In the case of individual ownership, the property is rebased upon the death of the owner. If the individual holds shares in the company that in turn owns the property, the shares are rebased but not the property. If the property is held in a trust, it’s not rebased on the death of the settler nor (usually) on the death of a beneficiary.
Depending on the individual’s circumstances, bespoke tax advice is critical. Even for investors with overseas property already, it might be worth re-evaluating their position to assess exposure.
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