UK Government “ATED” those tax reliefs
The UK and in particular London has enjoyed phenomenal increases in property values in recent years, resulting in many investors considering London residential property an asset class in its own right.
As a result many non-residents have invested in UK property and until recently were able to make these investments in a very tax efficient manner. A sale of a UK property by a non-resident was free of Capital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased. The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale. A number of tax reliefs are available to exempt or reduce the tax that may apply. Basic tax planning may... More and depending on the structure used to purchase the property it was possible to shelter the property from inheritance tax and to cap tax on rental profits to just 20%.
So why has this changed?
Quite simply the UK government has recognised a disparity (or at least a perceived disparity) in the tax treatment of non-resident and/or non-domiciled investors in UK property compared to UK resident/or domiciled taxpayers. They have therefore seized on the opportunity to create a level playing field, whilst, more importantly for the treasury, collecting more taxes at the same time.
The main changes have been:
- Since 6 April 2013 a penal 15% Stamp Duty Land Tax (“SDLT”) charge has been has applied to purchases of residential properties through a corporate structure. This originally only applied to properties with a value of £2,000,000+, but now applies to properties valued at more than £500,000.
- Since 6 April 2013 an Annual Tax on Enveloped Dwellings (“ATED”) has been in force, which in some circumstances results in an annual tax charge being applied to residential properties owned through a corporate structure. This originally only applied to properties with a value of £2,000,000+, but now applies to properties valued at more than £1,000,000 and from 6 April 2016 properties valued at more than £500,000.
- Since 6 April 2015, non-residents have become liable to capital gains tax on the sale of UK residential property. This is known as “extended-CGT” and needs to be considered carefully by all non-residents selling UK property.
- From April 2017, all residential property whether owned personally or through trust and company structures will be liable to inheritance tax on death of up to 40%. This is subject to reliefs such as the nil rate band and spousal exemption which could potentially exempt a large part of the property value. This change makes ownership through a corporate structure much less desirable.
- From 6 April 21017 it is proposed that mortgage interest relief will be restricted to the basic rate of tax. The impact of this will have to be assessed on a case by case basis, but could potentially mean that some landlords have up to 25% more tax to pay on rental profits.
So what action needs to be taken?
If you own a property via a corporate structure and which is in the ATED regime then you should contact us for a full review of your structure. We have considerable experience in analysing the pros and cons of these structures taking into account ATED charges, inheritance tax, capital gains tax, income tax and any associated offshore trust implications.
If you are intending to sell a UK property you should consider what your UK capital gains tax exposure might be and how this might be mitigated.
Finally, landlords generally will need to consider the impact of the mortgage interest relief restriction, for UK resident landlords there may be benefits to holding your portfolio via a corporate structure however this is not a straight forward solution and specific advise should be sought to ensure it is appropriate to your circumstances and financing requirements.
Finally, we can consider other methods of mitigating inheritance tax exposure, such as a well-drafted will, financing the purchase with debt, making gifts or taking out life insurance.
If we can assist you with any of these matters please contact us at the earliest opportunity.