Recent changes to UK tax rules will affect non-UK nationals who do not reside in the UK as well as foreign nationals living in the UK and who own property in the UK.
Non-UK nationals who have purchased property in the UK because it has been such a good long-term investment have not had to pay Capital Gains Tax (CGT) on the sale of their property, nor have they been subject to Inheritance Tax (IT), which is currently anything up to 40%. However from April 2015 this will no longer be the case: 28% CGT will be levied against the gain in the value of the property when it is sold, and the property will attract up to 40% IT when the owner dies.
Where used to be the best place to hold assets?
In the past, investors have formed companies to hold their property assets, but a new tax known as the Annual Tax on Enveloped Dwellings (ATED) has been introduced to discourage investors from buying property in this way. Those who already own "enveloped" property have been faced with an annual tax bill they did not anticipate. In the past, UK residents formed trusts to hold property, but a tax was imposed on these initiatives back in 2006.
Where are the best arrangements for the future?
On one’s death one’s estate including one’s home can attract inheritance tax of up to 40 %; however this need not be the case as there are many ways to avoid this situation legally. There has been a relaxation in taxation of pensions when the owner dies; from April 2015 your children may inherit your pension tax-free if you die before age 75 or at your children’s marginal tax rate if you die after age 75. However, residential property cannot be held by most types of pension fund, and there are few authorised advisors to inform tax payers about those in which one can hold residential property. With government keen to dissuade people from using "aggressive tax saving schemes", and by making it difficult to gain regulatory authorisation, government restricts people’s access to legal arrangements to reduce tax liability. This means that both advisers and clients are reluctant to take perfectly legal steps to move assets into arrangements where they will pay less tax.
How will the changes affect tax liability?
The clock is ticking for non-UK resident owners of residential property in the UK. In April 2015 there will be a marked change to the overseas market for UK residential property. Non-UK residents who sell a UK residential property will be subject to CGT:
- regardless of value;
- to gains made after April 2015;
- at a rate of up to 28% CGT.
- Offshore companies (not currently subject to ATED);
- Offshore companies (already subject to ATED);
- Personal ownership.
- Valued at £5 million as of April 2015
- Assume CGT remains at 28% (NB: two out of the three main political parties have intimated they will increase CGT to as high as 45% if they win the next election!)
- Assume a modest growth in value @ 5% per annum
|IT @ 40%||CGT @ 28%||Total|
|Scenario 1: on sale||N/A||£386,749||£386,749|
|Scenario 2: on death||£2,552,563||N/A||£2,552,563|
|Scenario 3: our advice*||NIL||NIL||NIL|
- No IHT exposure in the future
- No CGT if the property is sold
- Property owned in the company name rather than an individual’s will fall outside the ATED regime.