Foreigners who are purchasing high value properties in the UK, particularly in London, are exposed in greater measure to inheritance tax, particularly if the properties have future growth potential. On a property valued at £2 million, the exposure to inheritance tax at 40% (even after taking account of the additional nil rate band, currently £325,000, of a pre-deceased spouse added to that of a surviving spouse), is currently £540,000.
Prior to 1 April 2013, it was common for non-domiciled persons to acquire their UK residential properties through an offshore company. The shares of the offshore company were often held by the trustees of an offshore trust.
Impending changes to the capital gains tax regime applicable to non-residents owning UK properties, whether residential or for investment are likely to impact upon companies owning UK property, as well as other means of property ownership.
Since 21 March 2012,companies (and certain other corporate entities) holding high value residential property are now liable to 15% Stamp Duty Land Tax (“SDLT”) on acquisition , recurring yearly ATED charges, and also capital gains tax (“CGT”) at 28% on the “ATED- related gain” upon disposal of the property.
Previously, the gains of offshore companies disposing of UK residential properties escaped CGT.
The threshold at which the tax applies is to be lowered on a phased basis to £500,000 over the next 2 years. As from 1 April 2015, the entry level for the tax is any property over £1,000,000.
Reliefs apply where the property is held as part of a business (e.g. property rentals and developments). However, for properties which are used for residential purposes, the new tax regime is a deterrent to using offshore companies to hold UK residential property, unless the company is merely acting as a nominee.
“Future Gains” of Non-residents
Additionally, in his Autumn Statement in December 2013, the Chancellor announced that, from April 2015, capital gains tax is to be extended such that “future gains” on all disposals of UK residential property by non-residents would be subject to the charge.
It appears that non-resident individuals and partners holding UK residential properties are likely to be caught by the new regime, as are non- resident companies. The changes may also impact upon foreign trusts to some extent. The details regarding the applicable rates and how the tax is to operate are yet to be announced.
There will be no exclusions from tax on future gains by reason of business or commercial purposes.
A consultation was held between April and June 2014, and it is anticipated that the outcome of the consultation is to be published by the end of the year.
It is likely that the future gain which falls to be taxed may be determined by reference to a date from which the value of the property has been “rebased”.
The unexpected announcement on 4 August 2014 by HMRC that loans into the UK secured on unremitted gains will be a remittance into the UK as opposed to HMRC’s previous interpretation that the interest and costs of servicing the loan constituted a remittance, will impact upon the future financing of UK property acquisitions.
The recent consultation has also proposed further changes to the “principal private residence” relief for exemption for CGT. In respect of multiple residential properties, the election personally by the taxpayer as to which property is the principal private residence may be replaced by a determination according to objective criteria.
Should non-residents be imminently acquiring UK residential properties or contemplating doing so, it is advisable that advice be sought as to alternative solutions to mitigate UK taxes. Completion of property transactions may also be time critical, in the light of current developments.
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