UK residential property ownership has become an essential area in which to ensure you fully understand your tax position.
The taxation of UK residential property has seen significant changes in recent years. While the picture as to winners and losers is not straightforward, typically the tax cost and complexity associated with buying, owning and selling residential properties in the UK has increased. This is especially so for home owners who are either not domiciled or not resident in the UK.
SDLT is paid by the buyer on the acquisition of the property at rates prevailing at acquisition.
In Scotland SDLT has been replaced by the LBTT. This impacts all purchasers of land or property in Scotland. LBTT has different rates to SDLT.
In Wales, Land Transaction Tax (LTT) replaced SDLT from April 2018.
There is also a 3% SDLT/LBTT surcharge for purchases of additional residential properties such as buy-to-let properties and second homes. The surcharge will apply whether the purchaser is an individual or not, and
regardless of where the purchaser is tax resident. However, the surcharge will not apply where the property is the replacement of the purchaser’s main home or the purchaser’s sole residential property worldwide.
UK resident taxpayers have long had to consider whether they have a CGT liability (or a corporation tax liability on capital gains) when they realise a profit on the disposal of residential property in the UK. From 6 April 2016 individuals and trustees disposing of UK residential property are charged at the 28% higher rate of capital gains tax.
However, where the owner is an individual (and in certain circumstances trustees and personal representatives), there is the potential for relief from CGT on the sale of their only or main residence. Where an individual has lived in the property from the date of purchase to the date of sale, any gain arising on the sale is normally covered by Principal Private Residence relief (PPR) and fully exempt from CGT.
Non-UK residents have historically not generally been liable for CGT on sales of UK residential property under UK tax rules, in contrast with the tax systems of many other countries. However from 6 April 2013 rules have been gradually introduced which extend the scope of CGT to include non UK resident taxpayers. Initially only companies and certain other vehicles were subject to this tax and only with respect to gains on residential properties typically used by someone connected with them as their home.
From 6 April 2015 the scope of CGT is extended to tax capital gains realised by further classes of non-UK residents, including individuals and trustees, disposing of UK residential property, regardless of their value or usage (also known as Non-Resident Capital Gains Tax or NRCGT). NRCGT applies to capital gains accruing post 6 April 2015 on disposals of residential property located in the UK, with a requirement to make a return to HMRC within 30 days of conveyance of a property. Most types of communal property are excluded from the charge. The rules predating NRCGT largely continue to apply in parallel, which creates considerable complexity. There are however rules in place which seek to ensure that tax is not paid more than once on a gain.
PPR has also been reformed to accommodate this extended charge on non-UK residents. Taxpayers with more than one residence are still able to elect to choose which residence is their main residence for PPR, provided that they meet the necessary conditions. However, from 6 April 2015 it is more unusual for UK resident taxpayers to receive relief on disposals of non UK homes and for non UK resident taxpayers to receive relief on the disposal of homes in the UK. This is because the relief will require the individual to meet a “day count
test” in relation to the residence for each tax year for which it is claimed. Broadly, the “day count test” will be met if the individual or their spouse/civil partner spend at least 90 midnights in the property in the tax year.
With effect from April 2019 NRCGT will be extended to also tax:
Rebasing will be available to the April 2019 value where the taxable property is only brought into charge for capital gains tax as a result of these new rules.
ATED was introduced with effect from 1 April 2013. The rules are complex but broadly it is an annual tax charge which applies while companies and certain other vehicles hold UK residential property, typically for someone connected with them to use as their home (‘enveloping’). The value threshold at which the charge applies to a property fell to £500,000 from 1 April 2016. The value for the current chargeable period being 1 April 2017 – 31 March 2018 and all previous periods, is the value of the property as at 1 April 2012 or the date the property was purchased / completed if later. For all future periods (i.e. from 1 April 2018 onwards), there is a new valuation date being 1 April 2017. If a residential property was acquired prior to 1 April 2017, the value of that property as at 1 April 2017 must be considered in determining whether ATED applies, and if so, in which band the property will sit.
Where the ATED rules apply, the owner needs to file an ATED return with HM Revenue & Customs (HMRC) and either pay the tax or claim an exemption within 30 days of acquiring the property and every year the property is held thereafter (for example the exemption for properties which are rented out to third parties).
|Value of UK residential property||Annual charge for the period ended 31 March 2018||Annual charge for the period ended 31 March 2019|
|Over £500,000 up to £1 million||£3,500||£3,600|
|Over £1 million to £2 million||£7,050||£7,250|
|Over £2 million to £5 million||£23,550||£24,250|
|Over £5 million to £10 million||£54,950||£56,550|
|Over £10 million to £20 million||£110,100||£113,400|
|Over £20 million||£220,350||£226,950|
From April 2020 non-resident companies will be liable to corporation tax rather than capital gains tax on taxable disposals of UK property interests. This will change not only the rate of tax but also the method for calculating the chargeable gain.
Inheritance tax can apply at up to 40% on death or during lifetime at 20% on certain transactions such as gifting of property to trusts. Where an individual owns UK residential property these charges may apply regardless of where the individual is resident or domiciled. There may be debt which should be deducted from the value subject to IHT, depending on the circumstances.
In July 2015 the Conservative Government announced proposals to extend the scope of UK inheritance tax (IHT) to all UK residential properties. The comments below are a summary of the new rules included in Finance (No2) Act 2017 which are effective from 6 April 2017.
In the past non-UK resident individuals and non-doms (and their trusts) have been able to shield the value of UK residential property from IHT by holding property through a non-UK company. This has been effective for IHT charges arising on death and during the lifetime of an individual as well as ‘ten year anniversary’ and ‘exit’ charges on the trust.
New provisions are now in place that extend the UK IHT net to all residential properties in the UK that are owned by non-doms, whether the non-doms and any companies that own the properties are resident in the UK or not. This also includes those who lend money or provide security to purchase UK residential property. Such loans will be subject to IHT in the estate of the lender, regardless of lender’s residence and domicile position. This will apply to all loans, with no distinction for loans between connected parties.
Income tax (and corporation tax on income) is typically payable on rental profits or development profits but may also apply in other circumstances.
From 6 April 2017 new restrictions on the deductibility of finance costs for let residential property apply for some taxpayers.
Council tax is collected from occupiers by local authorities.
Each of the above taxes brings its own complexities and compliance burden which need to be understood.
Individuals who hold higher value properties or second homes, directly or through trusts and companies, typically need to take into account the overall effect of these taxes. In practice there will be a range of possible outcomes and it will be necessary to consider both the objectives and circumstances of the individual and all of the relevant facts.
Understanding the aims and requirements of the property owner are key to providing the most suitable advice. For example, is the property intended to be used as a long-term family residence or is it more of a shorter term investment?
If you already own UK residential property or you wish to make such an acquisition, these rules could affect you. Please call your usual KPMG Private Client contact.
Please note that the above commentary is intended to be generic in nature and should not be acted on without taking further detailed advice.