With many experts predicting that the UK property market is entering another boom, Wendy Walton, tax partner at BDO, outlines some of the key tax issues for buyers
The difficult economic situation and concerns about tax avoidance and affordability of housing have resulted in many changes that combined represent a major overhaul of the UK’s property tax rules. Yet a common question I am asked by prospective buyers is still: “How should I own the property?”
In the past, trust or corporate structures have been common, but their effectiveness depends on how you plan to use the property. I usually advise clients purchasing their main home to own it personally, but with investment properties it may make tax and commercial sense to hold via a corporate structure.
There is no one-size-fits-all solution, and the best answer depends on your personal circumstances and plans. For example, if you are resident and domiciled in the UK and plan to live in the property, then unless your family circumstances are complicated, owning the property personally is the practical and tax-efficient option.
For UK-resident and domiciled investors, holding a number of buy-to-let properties in a UK company can be worthwhile as rents and capital gains are only taxed at corporation tax rates. Further tax is paid when profits are extracted so personal ownership is more tax-efficient in the short term if you want access to the rents and gains on sale. However, care is needed when buying a property valued at £2 million or more.
Where there is any connection between the company and the person occupying the property, even on a letting at full commercial rates, the annual tax on enveloped dwellings (ATED), up to £140,000 a year, is likely to apply. Property letting and developing companies can claim exemption from this on ATED returns and only have to pay a maximum of 7 per cent stamp duty land tax (SDLT) where there is no occupation by a connected person, rather than 15 per cent where a company buys a property for its owner to live in.
There is no one-size-fits-all solution, and the best answer depends on your personal circumstances and plans
For non-UK-domiciled individuals, keeping assets outside the UK tax net may be a major consideration. Property ownership is a key issue as, on death, inheritance tax (IHT) at 40 per cent is paid on assets in the UK. Consequently, I have come across many historic ownership structures using an offshore entity – a trust and a company – to hold a UK property outside the UK IHT net or to protect the owners’ privacy.
This has often caused problems if the ultimate owner/director lived in the property as there is usually a benefit-in-kind charge for living in the company’s property and there could be capital gains tax (CGT) issues. For properties valued at £2 million or more, there is also now the penal SDLT rate to pay on purchase and the ATED to take into account, and offshore entities pay CGT on properties sold for more than £2 million after April 6, 2013.
In balancing these against the risk of IHT on the property value when they die, non-UK domiciliaries often decide to own their UK home personally. Careful use of loans or specialised insurance policies can reduce the IHT exposure.
Overseas investors not planning to live in the UK properties they buy have many ownership options as corporate ownership can be tax efficient. Of course, any structure needs to take into account the owner’s overseas tax position. All overseas owners should expect to pay 20 per cent income tax on their net rents and, while details of the new rules are not finalised, it is expected that non-residents selling UK residential property will be taxed on their gains from April 6, 2015 onwards. Draft proposals should be published shortly.
The best way for you to buy and hold UK residential property will depend on your circumstances, and how you choose to balance practical considerations against the tax costs. With so many variables, it is not something to rush into even if the market is booming.