The United Kingdom has long been considered a "tax haven" for non-resident individuals, companies and trusts investing into the UK property market. The favourable tax treatment for non-resident landlords has long been believed to be one of the major reasons for the long term continuing rise in property values in the UK. Rental income has traditionally exceeded both inflation and the normal rates of interest for cash investments and as a long term investment United Kingdom situated property has usually proved to be a valuable source of capital gains.
For UK citizens (those who are domiciled, ordinarily resident and resident) the only exemption to the charge to capital gains is where that individual sells his principal private residence. The exemption is lost for second or holiday homes and there are also significant problems which arise where even in the case of an individual's principal private residence he also uses that property in connection with his business. This position is not, fortunately, reflected in the case of those who are not UK domiciled or ordinarily resident.
In its simplest form a non-UK taxpayer can significantly reduce the liability to UK taxation by establishing a structure based largely upon the following:
A company is created in a country of low or zero taxation which is used to purchase property in the UK.
That company is financed by loans made from third parties be they trusts or non-UK resident individuals. It is an important consideration that interest, charged at market value, is paid on such loans.
The company acquires the UK property and the third party lender takes a legal charge over the property which is registered at the UK Land Registry.
The company approaches the Inland Revenue as a non-resident landlord and confirms, in so doing, that it will file accounts and annual returns with the non-resident landlord unit at the Inland Revenue. If such an application is successful the tenant of the UK property is entitled to pay any rent he is charged gross and directly to the non-resident landlord. In other cases a tenant paying rent to a foreign landlord in respect of the tenant's occupation in the UK of foreign owned property must be subject to a charge to withholding tax.
The annual accounts of the company show the rental income against which interest is an allowable deduction together with all other usual business expenses which might be incurred by the company (managing agent's charges, accountants and legal fees.
Properly structured the company will make little or no profit which will be chargeable to UK corporation tax.
A further and significant advantage of those present UK rules affecting UK based property owned by non-UK tax payers or companies is that the UK does not seek to charge capital gains tax on the income received from the sale of UK based property where the seller is not is otherwise UK tax resident.
Stamp duty is, however, a consideration in any UK property transaction where the name of the registered proprietor (owner) is changed at the UK Land Registry.
UK properties sold for a consideration in excess of £250,000 but less than £500,000 are charged at the rate of 3%, over £500,000 but less then £1,000,000 the rate is 4% and sales for a value in excess of £1 million are charged a stamp duty at the rate of 5%. However the 2012 budget has seen the introduction of a 7% stamp duty on properties that cost over £2 million (so called Mansion Tax) and 15% on properties over £2 million purchased via a company.
Z, a wealthy individual resident in the Far East, has surplus funds of approximately £1m that he wishes to invest in UK property, having heard that returns, significantly larger than those which might otherwise be obtained merely by leaving money on bank deposit, may be enjoyed.
Z has identified a portfolio of properties which will cost £1.6m and which will provide a gross rental return of 7.5% and an estimated capital growth of 2.7% per annum. Z obtained the advice of a firm of UK chartered surveyors and seeks further advice as to the manner by which the ownership of that property portfolio might be structured in order to minimise or avoid, legally, any income or capital gains tax.
Z may consider establishing in, say, the Isle of Man, a discretionary trust for the benefit of himself and his family. Z's £1m is settled in the trust. The trustees then establish a limited liability company in an appropriate low tax jurisdiction and, through that company, subject to obtaining finance to cover the £600,000 shortfall, acquire the portfolio. The directors of the purchasing company also register their company with the Inland Revenue as a non resident company, thereby enabling all rental income received from tenants of the property to be paid gross to the non-UK resident landlord companies.
The company submits annual accounts and tax returns to the UK Inland Revenue, which show a deduction from the profits received equivalent to the interest paid to the bank together with other expenses. After a period of, for example, five years the portfolio is sold for £1.9m and no capital gains tax is payable on the uplift in price. Issues of stamp duty (the UK tax payable on the transfer of property) may also be reduced or avoided in certain cases.
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