The recent increase in the Stamp Duty nil rate band in England and Northern Ireland to £500,000 has increased the attraction for UK property. As a result, it’s reported that UK property market activity is currently the highest seen for four years.
Despite the obvious benefit of the temporary reduction in Stamp Duty, there are still lots of other tax considerations to take into account, especially for expats. Here are some of the most common questions asked by non-UK residents who are thinking of purchasing a buy to let property in the UK:
WILL I HAVE TO PAY TAX TO PURCHASE A UK PROPERTY?
If you already own a property you generally pay a 3% Stamp Duty Land Tax surcharge above the normal Stamp Duty rates. This applies even if the value of the property falls within the current England and Northern Ireland £500,000 nil rate band. The extension to the nil rate band is set to end on 31March 2021 and from 1 April 2021 a further surcharge of 2% is set to be applied for non-UK residents purchasing UK property from that date. This would make the highest rate of Stamp Duty payable for a non-resident purchasing an investment property in England 17%. It is worth noting that Wales and Scotland have slightly different Land Tax regimes.
WILL THE PROFIT FROM LETTING MY UK PROPERTY BE TAXABLE EVEN THOUGH I AM UK NON-RESIDENT?
Non-UK residents are, generally, still charged tax on UK sources of income – including any profit made when letting your UK property. If you are an EEA citizen or hold a British passport you are generally entitled to a tax free personal allowance which, this year, exempts £12,500 of profit from UK tax; anything above that is taxed at rates of 20%, 40% and 45%. However, if you are not entitled to a tax-free personal allowance any profit made will be taxable. For a couple, do think about who should own a UK property and be charged any tax on the income. If only one of you is entitled to a tax-free personal allowance perhaps it’s better to have the property owned in their name, and use their allowance sensibly?
HOW CAN I STOP MY LETTING AGENT DEDUCTING TAX FROM MY LETTING INCOME?
Tenants or agents are required to deduct 20% tax from rental income paid to a non-resident landlord – whether or not that income is taxable. To stop tax being deducted at source you would need to sign up to the “Non-Resident Landlord Scheme”. If you do, HMRC, the UK tax authority, will then authorise your tenant or agent to pay your rental income without deducting any tax at source.
WILL I NEED TO COMPLETE THOSE TRICKY UK TAX RETURNS?
You are very likely to need to submit annual Tax Returns to report any income you receive from letting a UK property. HMRC states that if your gross profit is above £10,000 or the net profit (net profit is gross profit less allowable expenses) is above £2,500 then you need to complete an annual self-assessment form. At the moment that form needs to be submitted by 31January following the end of the tax year and any tax due needs to be paid by that date too. For the current tax year which ends on 5 April 2021 the Tax Return needs to be filed by 31 January 2022 which is also the due date for any tax to be paid. The UK will be moving to a “Making Tax Digital” reporting regime over the next few years which could well result in quarterly reporting and quarterly tax payments being required.
WILL I NEED TO PAY TAX WHEN I SELL MY UK PROPERTY EVEN IF I AM NOT A UK RESIDENT?
Yes, the sale of UK land and property will always fall into the UK Capital Gains Tax net even if you aren’t UK resident. There are special rules if you have been non-resident for less than five years, if you owned your UK property before 5 April 2015 and if you have ever lived in the property as your home. Capital Gains Tax rates for the sale of your UK property are charged at the highest rates of 18% and 28% depending on your Income Tax rates. It’s important to note that selling or gifting any UK property needs to be reported to HMRC within 30 days and any tax due needs to be paid within 30 days as well.
WILL MY UK PROPERTY BE EXEMPT FROM INHERITANCE TAX?
UK Inheritance Tax, which can be charged up to 40% on assets above £650,000 for a couple, is determined by your UK tax domicile status. This is a complex area of tax advice and you may need specialist help to understand your domicile status. Domicile is not the same as a tax residence status. Your UK tax residence is assessed every year using the rather complex Statutory Residence Test. Domicile is assessed over the longer term and is, in very general terms, an assessment of which country is your permanent home. You acquire a domicile of origin in your childhood and that domicile of origin is then very hard to shake off. If you are UK domiciled your worldwide assets will face UK Inheritance Tax. If you are not UK domiciled only your UK assets are within the scope of UK Inheritance Tax.
Taking all this into account it’s important to know that your UK investment property falls into the Inheritance Tax net regardless of whether you are UK domiciled or not. As a result, it’s important to carefully plan your tax affairs, and factor in the Inheritance Tax exposure when purchasing your UK investment property.
As a non-UK tax resident, when you purchase a UK property as an investment, do consider the UK tax implications. Generally, you pay tax when you buy, receive income from, sell and leave your property to the next generation. You also need to be aware of the requirement to register to be a non-resident landlord, the deadlines for submitting Tax Returns and paying tax on the income earned and the very tight reporting and payment deadlines when you sell your UK property. It’s also important to consider any tax implications and reporting requirements for your UK property that may come up in any other relevant country for you.
If you would like help with registering for the Non-Resident Landlord Scheme, your annual UK Tax Returns and reporting a sale of a property to HMRC we will be delighted to help you. We can also assist you with understanding your UK domicile status, a plan to reduce your Inheritance Tax exposure and how you can maintain your non-UK tax resident status.
For more information please contact your nearest office.
Peter Webb, Head of Tax Advisory