Personal Ownership and UK Residential Property Tax Laws

This article is the second in a series entitled 'A Tax Guide for Purchasing UK Property'.

Click to read part one

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Previously, this series highlighted the tax changes international investors should consider when purchasing property in the vibrant British market. Here, we hone in on how to navigate these property tax laws when engaging in personal ownership.

As outlined before, Rashid is a GCC national. He recently bought a villa in Spain and now wants to buy a house in London for £3m that he and his family will reside in when they visit.

As a non-UK resident who already owns a residential property, Rashid is subject to both the higher rate of SDLT and the 2% non-resident surcharge on the purchase of the property, which means a total SDLT of £423,750.

If he lets the house, he will be liable to UK income tax rates of up to 45%. He will therefore need to file a UK tax return and register under the non-resident landlord scheme.

The value of the property will be within the scope of IHT and a tax of 40% will be payable based on the market value of the house at the time of the charge. If Rashid took a loan to buy the property, then this could reduce the value of the property subject to tax, but in the meantime, he would have a borrowing cost to finance. There are also various anti-avoidance provisions that can restrict the deductibility of debt so Rashid should take professional advice if he wants to be certain that the value of the property for IHT purposes can be reduced by the amount of the debt.

As Rashid has an asset in the UK, he should prepare a UK will. Without a will, the ownership of the house will pass under the UK’s intestacy rules upon his death, which is a situation unlikely to mirror his own wishes. As IHT does not generally apply to transfers between spouses, no tax should be due if Rashid leaves the property to his widow. An alternative would be to own the property jointly from the outset, in which case the property would pass on the death of the first owner to the surviving spouse.

Marylebone Square, London

Marylebone Square, London

Another option to manage a potential IHT liability is to take out life assurance for an amount sufficient to cover the tax. Depending on the health and age of the insured, this can be a relatively cost-effective option. If Rashid follows this route, however, he will need to ensure that the proceeds on his passing are paid outside the UK. Otherwise, he will simply be increasing the amount of his British estate.

If Rashid does decide to sell the property at some stage, then he will be liable to UK NRCGT at a maximum of 28% (based on the increase in the value of the property). Had he owned the property for a number of years, then the gain would be calculated based on the increase in value since April 2015. An NRCGT return must be filed and any tax must be paid within 60 days of the sale’s completion.

Personal ownership can be advantageous to international investors, especially those wanting to occupy the property themselves. But it is also prudent to consider a structure at the other end of the real estate spectrum – corporate ownership.

Click here for part three

Christie’s International Real Estate Dubai is an established player in the luxury real estate industry. Being the sole Middle Eastern affiliate of Christie’s International Real Estate, it is part of a worldwide network spanning 47 countries. This enables the company to conduct regional and global property transactions with a high level of expertise and discretion.

Headquartered in Dubai, Alderley Global (registered with the Institute of Chartered Accountants in England and Wales) primarily focuses on multi-jurisdictional tax advice and trustee services to address the common challenges faced by high and ultra-high net worth individuals and families across the globe.

Disclaimer: The content of this article is for guidance only. Professional advice should be obtained before acting on any information contained within this article. No responsibility can be accepted for loss occasioned to any person as a result of action taken or refrained from in consequence of these contents. Any reliance you place on such information is therefore strictly at your own risk.