A guide for non-UK resident clients on some of the key tax and other planning considerations
The UK continues to be a destination of choice for people seeking to purchase residential property. With its depth of culture and breadth of business opportunities, plus its convenient time zone and fantastic education options, many seek properties as permanent homes, holiday or seasonal homes; others as places to stay whilst doing business, or as investment opportunities.
As in many countries, in the past decade there have been numerous and significant changes to the way the UK government taxes residential property. The global trend has been for the tax burden on residential property to increase, and the UK is no exception. In the UK, broadly speaking the government has used tax as a way to discourage indirect ownership and to increase transparency around who ultimately owns residential property. These trends are likely to continue.
It is therefore as important as ever that you take both the right conveyancing and legal advice as well as tax advice in advance of your purchase.
This note highlights some of the basic tax and legal considerations that form part of residential property purchases in the UK. It should act as an introduction to the topic to help inform your detailed discussions with your independent tax and legal advisors.
The legal process
Once you have found a property you are interested in, the process of acquiring it can be exciting and it is certainly a process worth being prepared for.
There are two key principles to note. First, you will not be legally bound to acquire a property until you exchange contracts with the vendor. The bulk of the work relating to a purchase is completed before the exchange of contracts. You will have to pay a deposit on exchange of contracts (typically c.10%).
The second key principle is ‘caveat emptor’, or ‘let the buyer beware’. This is the legal principle that it is your responsibility as the buyer to investigate and discover everything you need to know about the property before you purchase it. This work is undertaken by your conveyancer/lawyer who will undertake pre-contract searches with, among others, the Local Authority, make enquiries of the vendor and investigate the property’s title. You will need to instruct a surveyor to undertake a survey of the property itself.
On the one hand, this process provides you with the flexibility to change your mind about purchasing the property – say, if you find something out about it that cannot be addressed as part of your commercial negotiations. On the other, it means that you will incur costs in learning about the property before you and the vendor are bound to transact.
Freehold or leasehold?
In the UK there are two main forms of home ownership, freehold or leasehold. If you own a freehold house you normally own the property and the land it sits on. You are responsible for all maintenance and can make alterations to the property as you wish (subject to any planning permissions required).
If you own a leasehold, you do not own the land the property sits on. You will have to comply with any restrictions found in the lease (which is the agreement between you and the freeholder of the property). You are unlikely to be able to make structural alterations to the property and will likely have to contribute to the maintenance of the property, sometimes through a service charge. Flats are usually sold as leaseholds. The length of the lease is often 99 or 125 years and as this period reduces, the value of the leasehold is likely to reduce too. It is sometimes possible to extend a lease.
How will you fund the purchase and the deposit?
Broadly, if you are moving to the UK for the first time but continue to consider another place to be your permanent and indefinite home, you are likely to become a UK resident ‘non-domiciled’ person (a status which has a number of tax implications which you should seek UK tax advice on, alongside the advice you will receive in relation to the property purchase). You will need to consider with your UK tax advisors how best to fund the deposit due on your property purchase, together with the balance of the purchase price, in an efficient way.
Often UK resident non-domiciled individuals will have a pool of so-called clean capital that they can bring to the UK without a tax charge which they use to fund the deposit. You will need to consider with your tax advisor whether it would be tax efficient for you to take out a mortgage against the UK property (see the inheritance tax section below for more information on this).
If you would like to learn more about J.P. Morgan’s mortgage capabilities please click here.
UK tax advice will also be important in ensuring that any other security is required by the bank is structured appropriately with UK tax issues in mind.
If you intend to remain non-UK resident there will be less complexity around how best to fund the deposit as there is unlikely to be a UK tax issue when bringing those funds here. However, you should still take advice on the UK inheritance tax consequences of the arrangements, together with other UK tax considerations resulting from the purchase and future sale of the property and any rental income you might receive from your tenants if you rent it out.
In March 2024 the Chancellor of the Exchequer, Jeremy Hunt, announced the cancellation of the UK’s non-UK domicile regime from April 2025 with proposals for a new residence-based regime put forward. Prior to implementation of any new regime there will be a general election in the UK resulting in the formation of a new government and it remains to be seen as to whether the new government would adopt the current proposals in full. Impacted individuals should liaise with their UK tax adviser to understand how the proposed reforms may impact their UK tax position.
How will you own the property?
Once you have found the property you were looking for and have commenced the preliminary work with your conveyancer, it is worthwhile taking tax and legal advice to decide the most sensible way for you to hold the property given your personal circumstances and the objectives you have for the property. In recent years we have seen an increasing trend towards direct ownership, rather than ownership through a company, particularly where the property is intended for personal use.
There may remain some limited circumstances where corporate or trust ownership might make sense. If the property is held through a structure, the tax considerations can be complex and you should ensure that you obtain advice from a UK tax advisor.
What taxes apply to the acquisition and disposal of UK residential property?
Stamp Duty Land Tax (“SDLT”)
You will pay SDLT on the acquisition of residential property in your own name in England or Northern Ireland.1 2
From 23 September 2022,3 the standard rates of SDLT payable by purchasers who are individuals purchasing a single property are:4
If you are buying your first home
You can claim a relief if the property you are purchasing is your first home. The effect of the relief is that you’ll pay:
- no SDLT up to £425,000,
- 5% SLDT on the portion from £425,001 - £625,000.
This relief is only available if you and anyone else you are purchasing with are first-time buyers, and the price you are paying for the property is under £625,000. If the price of the property is over £625,000 you follow the standard SDLT rules.
It should be noted that the above rules were amended to be a temporary reduction in the Autumn Statement 2022. These rules are due to remain in place until 31st March 2025. They will then revert to the previous rules. 5
Additional 3% SDLT Rate
An additional 3% charge is added to the standard rate of SDLT if the UK property you are purchasing is in addition to another residential property you already own anywhere else in the world.
This additional 3% surcharge will not apply if you are replacing your main home on the same day.
If you do not sell your former main home on the same day as you acquire your new UK property, you will be required to pay the additional 3% SDLT charge, but you will have up to three years to sell your former home if you wish to reclaim the additional tax. Once it is sold, you can reclaim the additional 3% SDLT charge.
The purchaser and their spouse or civil partner are treated as one person for the purpose of the additional 3% rate. So, if your spouse owns a residential property anywhere else in the world and you are purchasing the new UK residential property, you will be treated as one person and the additional 3% SDLT charge will still apply.
2% non-UK resident surcharge
An additional 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland was brought in on 1 April 2021. This will in effect mean that if you are purchasing a UK property that will not be your main home (i.e. you already own another property), you will pay the 2% non-UK resident surcharge plus the 3% SDLT charge on the purchase of additional homes. In this example, the top rate of SDLT on the value of your property purchase above £1.5 million will be 17%.
For SDLT purposes you will be regarded as non-UK tax resident if you have not spent 183 days in the UK in the preceding 365-day period. Your tax residence status under the UK’s Statutory Residence Test should be ignored.
15% flat SDLT rate on corporate ownership
If you buy a property through a company, and that property is worth more than £500,000, a flat rate of 15% SDLT will apply. There are some limited exemptions from the flat 15% SDLT rate where, for example, the acquisition is for the purpose of letting as part of a rental business or as part of a property trading or development business.
Purchase of shares in a property holding company
If you buy the shares in a non-UK incorporated property holding company, you may not be liable to pay Stamp Duty or SDLT. However, there are a number of potential downsides to acquiring the shares in a property holding company that you should explore with your tax and legal advisors, not least, the Annual Tax on Enveloped Dwellings (outlined below).
In addition, since 6 April 2017, holding UK residential property through a company provides no protection from UK inheritance tax (see below).
Annual Tax on Enveloped Dwellings (“ATED”)
Broadly speaking, ATED is an annual tax payable by companies that own UK residential property valued at more than £500,000.
The current ATED charges are:6
Chargeable amounts for 1 April 2024 to 31 March 2025
There are a number of reliefs from ATED, with the two most common being where the property is let to a third party on a commercial basis (so long as the occupant is not connected to you, the owner) and where the property is part of a property trader or developer’s business.
Capital gains tax (CGT)
CGT is payable by all UK residents and (since 6 April 2015) non-UK residents at 24% on any gains realised on the disposal of UK residential property.
Having said that, relief from CGT is available under Private Residence Relief (“PRR”) on gains arising on the disposal by gift or sale of your only or main residence. This relief is available to individuals but not to companies.
You are able to nominate which of your properties should benefit from PRR within two years of the date from which you owned more than one residence.
The period of ownership begins on the date of acquisition (or on 31 March 1982 if that is later) and ends on disposal. Provided the residence has qualified for PRR at some point, the final 9 months of ownership automatically qualifies for PRR regardless of use.
In practice, if you are non-UK tax resident, it may be difficult for you to benefit from PRR. This is because in order for a property to qualify for PRR you must have spent at least 90 midnights in the tax year in the UK property or in another UK property which you own.
From 27 October 2021 onwards, both UK and non-UK residents who dispose of residential property in the UK will need to report and pay any CGT due within 60 days of completion of the transaction.
US citizens who purchase UK residential property should give careful thought to their tax position in both the US and UK. In particular, they may be subject to US tax on any gain, in addition to any UK tax payable on the gain (if it is not fully exempt from UK tax under PRR). However, it should be possible to credit any UK tax paid against the US tax liability to prevent double taxation of the gain.
Non-UK tax resident individuals disposing of an interest in a company which derives its value from the underlying UK property will be subject to UK non-residents capital gains tax on any gain realised. PRR will not be available to alleviate any of the chargeable gain arising on the disposal of the shares.
Inheritance tax
The main exposure to UK inheritance tax for non-UK residents and non-UK domiciled individuals will often be as a result of their ownership of UK residential property. This is often a key area that they wish to seek tax advice on.
Even if you do not intend to become resident in the UK, if you buy a residential property here it will be within the scope of inheritance tax. Inheritance tax is charged at 40% on death on the value of all of a non-UK domiciled individual’s UK situated assets (whether or not they are UK resident). Debts owed by the individual may reduce the amount exposed to inheritance tax in some circumstances.
It should be noted that property passing between spouses is generally exempt from inheritance tax (subject to certain limitations where the property passes to the surviving spouse, and they are a non-UK domiciled individual).
Your exposure to inheritance tax in the UK can be mitigated by securing a mortgage against the property upon acquisition. In addition, you might consider life insurance to cover any inheritance tax exposure in respect of the equity you own in the property.
Where the property is held through a structure and not personally, to the extent that your interest in that structure derives its value from the underlying UK residential property, the interest in the structure will be subject to UK inheritance tax.
Where your UK estate is less than £2 million you may be eligible for the residence nil rate band of £175,000 (up to £350,000 on death of second spouse) where the home is left to your direct descendants.
The Conservative Party are due to launch a consultation by Summer 2024 providing further detail on the proposed reforms to inheritance tax arising as a result of the cancellation of the UK’s non-dom regime announced in the 2024 Spring budget.
Income tax
If you are intending to let the property, you will receive rental income in the UK which will be taxable at your marginal rate of UK income tax, regardless of whether you are UK resident or non-UK resident. A tax relief limited to the basic rate of income tax (20%) is available for an individual landlord’s mortgage interest costs in computing their taxable rental income.
Introduction of “Register of Overseas Entities” owning UK land
As part of the Economic Crime Bill, the government introduced a ‘Register of Overseas Entities’. This measure forms part of the UK Government’s strategy to tackle economic crime, and bring overseas entities owning UK property within the same rules as UK entities, which are required to disclose their beneficial owners’ identities to Companies House.
The register was launched on 1st August 2022, and includes severe sanctions for those who do not comply, including restrictions on buying, selling, transferring, leasing or charging their land or property in the UK.
Captured in the rules are overseas entities who want to buy, sell or transfer property or land in the UK. Also caught are overseas entities who already own or lease land or property in the UK. The deadline for these entities to register was 31st January 2023.7
Final thoughts
There is a clear need to take early and detailed tax and legal advice from independent advisors. In the meantime, if you would like to discuss some of these concepts in more detail with our Wealth Advisory team, or if you would like to explore your mortgage options with our Mortgage team, please do not hesitate to get in touch with your J.P. Morgan representative.
1 This note specifically addresses the tax and legal considerations when purchasing a residential property in England. It does not consider acquisitions in Scotland, Wales or Northern Ireland.
2 There are equivalent property transaction tax regimes for residential property located in Scotland and Wales.
3 Between 8 July 2020 and 30 September 2021 there were reduced rates of SDLT, further information can be found here: https://www.gov.uk/stamp-duty-land-tax/residential-property-rates
4 https://www.gov.uk/stamp-duty-land-tax/residential-property-rates
5 https://www.gov.uk/government/publications/autumn-statement-2022-documents/autumn-statement-2022-html
6 https://www.gov.uk/guidance/annual-tax-on-enveloped-dwellings-the-basics
7 https://www.gov.uk/government/news/the-new-register-of-overseas-entities-is-live
