Buying Residential Property In The UK: Key Issues
UK residential properties are a favoured investment for many international investors. The factors that contribute to the popularity of this investment option include the steadily growing capital value and rental income of UK residential properties and that the opportunity to buy and own residential property in the UK open to anyone – overseas investors of any nationality are able to buy, own, rent out, and sell properties in the UK. In this article we outline the key issues that need to be considered when buying a residential property in the UK because owning a UK property comes hand in hand with a number of UK tax burdens.
Income Tax
If you rent your UK property out, you must register as a non-resident landlord in the UK and pay taxes in the UK on your rental income. You must also submit the Non-Resident Landlord Returns to the HMRC.
Inheritance Tax
When upon the owner’s death UK residential property is transferred to the family, no matter where the owner and the family are domiciled and resident, the transfer of these assets to the heirs is governed by English law and is taxed in England under the English law.
The heaviest tax burden in the UK that the heirs may have to bear in the case of the owner’s death is the UK Inheritance Tax (IHT). The IHT rate is 40%. This rate is payable on the value of the UK residential property above the Nil Rate Band. The Nil Rate Band is reviewed by the UK Government every year, and for the year 2022 is set at 325,000 pounds sterling. The IHT is charged regardless of where the owner of the property and the heirs are domiciled or resident. However, there are legal ways to structure the ownership of the property to optimize the IHT burden.
Depending on the personal circumstances, the IHT can be reduced by a number of solutions:
- First, is the Will for the spouse. If the owner bequests the UK residential property to the spouse, no UK IHT will be payable if the spouse survives the owner. Further down the line, certain exemptions may apply when the assets transfer to the children.
- Second, a Family Investment Company can be structured to own the UK residential property and if the original owner of the property survives the transfer by 7 years, no IHT on the property will be payable by the heirs.
- Third, trust. As with a Family Investment Company, a trust can be designed to take the assets outside the scope of the Inheritance Tax. The trade-off is the 20% entry fee, a 6% exit charge on the distribution of assets, and a 10-year fee payable on the assets held in trust. It is also necessary to survive the transfer to the trust for seven years to make the most of the IHT.
Which option will work for you depends on your personal circumstances, in particular:
- Were you or your spouse born in the UK to the UK-born or domiciled father?
- Did you, your spouse and (or) your children live in the UK, when and how long?
- What are your UK assets and what is their value?
- How the ownership of the resiodential property is structured.
Capital Gains Tax
If you sell your UK residential property, tax is payable on the gains you make from the sale.
Annual Tax on Enveloped Dwellings
Residential properties owned by companies usually must pay annual tax on enveloped dwellings. Properties rented out on the commercial basis to unrelated persons and properties valued below £500,000 are exempt.
Stamp Duty Land Tax
If you transfer your property to another owner, Stamp Duty Land Tax is normally payable on the market value of the property.
There are a number of tax exemptions and tax optimization scenarios acceptable for the HMRC to assist in planning the ownership and use of the property.
How Can We Help You?
Consulco has been investing in the UK residential properties for more than a decade. Over these years we have developed the knowledge, the knowhow, and the professional networks that enable us to assist with acquisition and succession of residential properties in the UK. Get in touch with us so we can start you on your English landlord venture.