Over the past few years, non-residents wishing to own residential property and expats who own rental property in the UK have had to adjust to a lot of important changes. Sadly, the UK tax system has become more and more complicated as the government tries to tackle tax avoidance and close perceived loopholes. However, this often causes hardship on those landlords who wish to be compliant and who aren’t trying to avoid any tax obligation.
The toughening up of the tax-penalty regime means that if you get something wrong, you are more likely to find yourself with a sizeable penalty to pay. Where there is an overseas element involved, including the fact that you are simply receiving your rental income outside the UK, then the tax-penalty is significantly higher.
At Howsy, we have quite a large base of landlords based overseas, both UK citizens living abroad and foreign property investors. To keep everybody informed we invited Maggie Gonzalez and Richard Pott, director and manager of Buzzacott respectively joined us for our latest webinar aimed at giving you an understanding of these important changes and how they affect your UK tax obligations. You can watch the webinar here or read the article below.
IMPORTANT: The article below has general information value only. Each landlord’s situation is unique and you should seek professional tax advice before implementing any measures. No Agent Technologies Limited cannot be held responsible for any loss, direct or indirect.
The Non-Residential Landlord Scheme
As a non-resident, your tenants or letting agents are required to deduct a 20% basic rate income tax from the rent before they pay it over to you. While most agents are set up to deal with this reality, it can be a real problem for tenants. Both agents and tenants are always going to be cautious in deciding what they can deduct because they are the ones to pay the tax and HMRC as UK tax authority would chase your tenant or your agent for the tax that should potentially have been deducted.
If you want to receive your rents without any tax deducted, the best approach is to register for the non-resident landlords scheme so HMRC will authorize your tenant or your letting agent to pay you the rent gross and then pass all the tax reporting over to you for complete control. All you need to do is complete a form which you can find online giving details of yourself and your property.
There are some conditions that you have to meet for HMRC to authorize you on the scheme. You have to be completely up to date with your UK taxes even if it has got nothing to do with properties. Also, you will have to stay compliant or your authorization can be withdrawn.
As an overseas landlord, you need to remember that unlike most countries, the UK system runs from the 6th of April in one year to the 5th of April in the next year. Your income tax returns have to be submitted by the 31st of October following the end of the year if you are going to send it in on paper or by January 31st if you want to file online. Your income tax is to be paid in three installments. First of all, on the 31st of January during the tax year, you pay 50% of the previous year’s liability, then on the 31st of July of the tax year, you pay a second 50% of the previous year’s liability and then finally on the 31st of January at the same time as you are filing your tax return online, you have a balancing payment or repayment.
What do you need to pay Tax on?
UK Tax on Rents
You will need to calculate your rental profit, which means all your rents excluding all the expenses. However, not all expenses can be deducted. They have to be incurred wholly and exclusively for the rental business and they can’t be capital expenses. For instance, your annual insurance premium for the property can be deducted but if you build an extension, you can’t deduct the cost of the building work then deduct capital calculations when you sell.
As an individual, you would report on what we call the cash basis if your rents amount to less than £150,000 a year. That means that you only include income and expenses if you’ve actually received them or you have paid them.
You can choose an accrual basis which then matches your income and expenses and takes them into account, which will smooth your profits year-on-year. Overall, you would get a slightly lower tax rate if suddenly your income was pushed up a lot. However, there are some transitional adjustments that need to be made if you move from cash basis to accrual basis just to make sure nothing is missed out or double counted.
There is a specific restriction which was introduced from April 2017 in respect to finance costs which would include mortgage interest and arrangement fees typically for the 2017/2018 taxes, which comes to a 75% deduction in arriving at the tax rental profit. By 20/21, this would be reduced to 0%. Instead of getting a deduction for these expenses, there would be a basic rate tax reducer which is 20% calculated on your taxable rent profit and the unrelieved finance costs. You can read more about this tax restriction here.
Improvements to your property such as an extension would not qualify for a deduction from income. But for repairs to property or repairs to fixtures and fittings, it is possible to claim a deduction for the costs incurred. Typically this needs to be a replacement or decoration. Where there is some element of modernization, for example replacing single glazed windows with double glazing or if you are replacing a faulty boiler with the modern equivalent, that would also qualify.
Equally, the replacement of domestic items such as furnishings will also qualify for relief but it’s important to note that this is the replacement so the initial purchase of such items will not qualify.
UK Tax on Sale of a House/Flat
Non-Resident Capital gains Tax (NRCGT) on Residential Property
This is payable by non-resident individuals where they are disposing, which is serving or giving away, interest in UK residential property and it applied from the 6th April, 2015. The NRCGT for a company would be 20% and for individuals, it would 18% or 28%; typically 28%.
The gains based on the increase in valuing that property from 6th April 2015 or if it was acquired after that date. There are two other methods of calculation, but they might not produce a better result. They are the retrospective basis which effectively is taxed on the whole gain since you acquired it or the time and apportionment basis which will calculate the entire gain and then apportion it for the period from April 2015.
In all cases, a non-resident capital gains tax return must be submitted within 30 days of completing the disposal and this is the case even if there’s no tax due. If there is tax due, this is typically payable within 30 days as well. As you file a personal tax return every year, you can choose to defer payment until the normal payment date which for a personal tax return would be the 31st of January following the tax year of disposal.
Stamp Duty Land Tax
Another tax worth quick mention is the stamp duty land tax- SLDT. This is payable by the purchaser when acquiring a UK property based on the purchase price paid. If this is not your only residential property in the UK or if you are acquiring through a company, there is also a 3% supplement and you can see the rates below:
|Up to £125,000||0% (3%)|
|£125,000 to £250,000||2% (5%)|
|£250,001 to £925,000||5% (8%)|
|£925,000 to £1.5 million||10% (13%)|
|Over £1.5 million||12% (15%)|
There is also 15% penal rate that applies to properties that are subject to ATED you can read about below.
Corporate Investors – Unusual Taxes
Investing through a company – Annual Tax on Enveloped Dwellings (ATED)
This tax applies to a non-natural person – including companies, partnerships, collective investment schemes and those that hold UK residential property. It is based on the value of the property for the 2018-2019 return. The property is valued every five years to determine which of the bands shown below the property would fall into.
|Property value||Charge for 2018/2019|
|£500,001 to £1,000,000||£3,600|
|£1,000,001 to £2,000,000||£7,250|
|£2,000,001 to £5,000,000||£24,250|
|£5,000,001 to £10,000,000||£56,550|
|£10,000,001 to £20,000,000||£113,400|
There are some reliefs that are available and you can claim relief from the ATED charge where you fall into one of the categories above. The most common one is where the property is let commercially to an independent third party in which case you can claim relief freely from the ATED charge of the year. However, you still need to file what is referred to as an ATED relief declaration return and the filing deadline for both related returns and the annual declaration is the 30th of April of the year to which this relates.
For properties that fall into the ATED charge, there is also what is referred to as ‘ATED related CGT’ and this can actually apply in conjunction with non-resident capital gains tax. However, where there is a case that the property falls into both charge, the ‘ATED CGT’ will take precedence. The ATED related CGT is based on the increasing value of the property since it came under the ATED charge and on the site, you can see when the property would have fallen under the ATED charge.
If relief applies at any point from the ATED charge, for instance, if it wasn’t commercially let, then that would take the property out of the ATED CGT charge for that period but any other period is subject to the ATED CGT. The return for the ATED CGT return should be filed by the 31st of January following the year the properties were disposed, sold or transferred.
Investing Through A Non-UK Resident Company- Other Differences To Direct Investment
There are a few other differences if you are investing through a company.
- Relief for finance costs
Relief for finance costs is available for a company for all the costs that are wholly and exclusively incurred for the property business. That means that you can’t gear up your company and invest your borrowings in something other than property and get full relief for the interest against your property rental income.
- Accruals basis and 20% tax rate
You would report on the accrual basis not the cash basis with a tax rate of 20% which is the basic rate tax in the UK. As an individual, your tax can be up to 45% if your taxable income is over £150,000 pounds for the year.
- No personal allowances
A company is not entitled to any personal allowances whereas an individual could be either if you are a UK citizen or where you live in a country that has a double taxation agreement with the UK which grants you the personal allowance.
- 6 April 2020: Corporation Tax
From the 6th of April 2020, companies with residential property and also commercial properties will be subject to corporation tax rather than income tax. This brings in concepts such as loan relationships, a worldwide debt cap and restrictions on corporation tax loss deductions. They give you exactly the same overall rental profit when calculated, but they add more complexity to filing your tax return and dealing with all your tax obligations.
Inheritance Tax- a Trap for the Unwary
If you own property directly, it will be subject to inheritance tax in the UK on your death. Inheritance tax in the UK is currently charged at 40% after a £325,000 allowance. For anyone who is not domiciled in the UK (which means you originated in the UK but have your real home outside the UK) or you lived in the UK previously and have left the UK permanently to settle somewhere else, anyone with that status is only taxable on their UK assets.
Previously, the general advice for anyone in the above situation is to invest in the UK property through a non-UK company and as a result, you owned a non-UK asset rather than a UK asset. However, from the 5th of April 2017, this no longer takes those properties out of the UK inheritance tax charge. Surprisingly, it’s not just the properties themselves that are included.
If there are any loans made to another party for them to buy, improve or maintain a UK residential property and more surprisingly any collateral to support a loan like that, such loan and collateral owned directly or through a non-UK company or partnership will be subject to inheritance tax. This implies that there are fewer reasons now to hold property through the non-UK company.
When you have made a loan and the loan is repaid or where you hold a company and you sell the company rather than the property, you are not out of the woods just yet. There is a further two years you have to wait before your proceeds from that sale are no longer subject to UK inheritance tax.
Here are the answers to a few questions answered by Maggie and Richard during the webinar.
- Should my non-resident business partner be receiving his proceeds from a joint property with a tax deduction? Is there any potential problem for me?
This would depend on whether or not you are considered to be the agent for your business partner. It would make sense for him to register as a non-resident landlord to avoid future issues with the UK tax authority. It is always safer to be in the system. However, provided he is reporting all his income to HMRC and paying the appropriate taxes, you should be okay.
- If I plan to move abroad at the end of the year, what initial steps should I take?
At that point, you would need to determine when you are becoming non-resident. Once you are non-resident, you will fall into the non-resident landlord schemes. You also need to apply to receive the rents gross. If you have an agent, they may hold onto some of the rents until they get the authorisation to be able to pay you gross.
- When investing family money, is it better to invest through a non-UK company or personally? What would be the best way to proceed?
This would depend on the money and amount of property involved. The more properties that you have, the higher the value and the better it is to invest through a non-UK company provided that the properties are all going to be let. If any of the family wants to live in the property, that is a completely different matter and you would need to take our advice on how that will be structured.
- When investing in UK property, is it better to buy through a company?
It is possible that a company might be the best option but we will need more facts. It is advisable to watch moving the properties that you own directly into the company. Even though the company doesn’t pay you anything for the properties, you would have to pay stamp duty and land tax on the full value of the property so that could be up to 15%.
- Owning a property that is currently being renovated through an Ltd company, is paying ATED on this property before it is rented out advisable?
As long as nobody connected (shareholder or director) has occupied the property and it is just being renovated and marketed straight away, you would be allowed to claim the relief from the lettings from the ATED charge. However, if there was any usage, you need to have some letting activity before you claim the relief and it would be subject to ATED. There are no other charges to bear in mind in this scenario apart from rent income.
At Howsy, we manage property in the UK on behalf of many overseas landlords, and we are up to date and on top of all the challenges that can arise. Our service provides a complete property management service that includes finding you tenants, rent collection, regular inspections and repairs management – all for a low fixed monthly fee and no hidden fees. Take a look at our service and get in touch if you want to know more.