Taxing UK residential property Presentation to the STEP conferences, Autumn 2017
OWNING A RESIDENTIAL PROPERTY WHICH TAXES? SDLT Income Tax Capital Gains Tax/Non-resident capital gains tax ATED and ATED-related capital gains tax Inheritance Tax
BUYING PROPERTY SDLT and IHT Residential property for SDLT purposes = land/buildings which used as a dwelling, or suitable for use as a dwelling, or in the process of being constructed/adapted as a dwelling. Progressive bands of SDLT, plus supplemental 3% charge for buy-to-let/second properties/holiday homes. Loans for acquisition of residential property, or for maintenance/enhancement, are deductible for IHT purposes in borrower s estate. Note wider rules under FB(No 2) 2017, aiming to ensure foreign lenders (individuals, trusts or close companies) are subject to IHT on the value of any loan used to buy/improve residential property.
BUYING PROPERTY in whose name? Finance Bill (No 2) 2017 contains changes which mean non- UK doms (and non-res trusts) holding UK residential property through foreign companies are subject to IHT. These structures are also often chargeable to ATED. Many have chosen to de-envelope. Hold Co. ATED Hold Co. ATED IHT Deenveloping IHT
BUYING PROPERTY in whose name? (contd.) Buying through a company and then de-enveloping can lead to a multitude of tax problems. Saving SDLT (if at all) is only part of the story. If a trust buys property, and settlor can benefit, this gives rise to both periodic charges and a GROB problem. Keep it simple: individual names in most cases.
DISPOSING OF PROPERTY selling Since April 2015, the scope of CGT has been extended to non- UK residents through non-res CGT (NRCGT) and ATED-CGT. For non-uk trusts, the pre-2015 balance of the gain is still added to the gains pool, and taxed on the settlor (s86) or beneficiaries who have received a benefit (s87). Private residence relief may apply to individuals and trustees. One of multiple main residences may be elected BUT only if individual is tax resident in the country where the property is (or spends at least 90 days p.a. there). i.e. in practice not available to foreign residents with UK holiday home. Lettings relief available
DISPOSING OF A PROPERTY - PRR Restriction as to garden or grounds not greater than permitted area. Always get the last 18 months ownership as exempt as well as the first 12 months of ownership if the property was being built or renovated or could not sell old home. No part of home used exclusively for business purposes. If taxpayer owns more than one home elect within 2 years of acquiring second home. Capital gain or trading income?
DISPOSING OF PROPERTY gifts CGT may apply to gifts of property (including NRCGT and ATED-CGT). IHT may also apply if the donor dies within seven years (tapering after 3 years). Under FB (No 2) 2017, gift of shares in non-uk company holding UK residential property will be treated as disposal of property itself for IHT purposes. Disposal of shares still not subject to CGT if transferor is not UK resident. Distributions of residential property from a trust will incur an immediate exit charge, although CGT holdover relief may be available.
DISPOSING OF PROPERTY gifts (contd.) Where an individual passes residential property on death to their direct descendants, a residence nil rate band of (currently) 100,000 is available. This is tapered off for estates in excess of 2 million. The additional threshold is set to rise to 175,000 by the 2020/21 tax year. Unused residence nil rate band can be passed to a spouse in the same way as an ordinary nil rate band. Direct descendants include spouse and widows of lineal descendants.
BUY-TO-LET new deductibility of interest rules Since April 2017, tax deduction against rental income for individual landlords to be gradually replaced by basic rate relief as a deduction of tax liability: Tax Year % of finance costs % basic rate reduction 2017/18 75 25 2018/19 50 50 2019/20 25 75 2020/21 0 100 The basic rate reduction is 20% of the lowest of non-deducted finance costs, or profits of the property business, or individual s income exceeding personal allowance. Finance costs not used in one year to calculation deduction in one year can be carried over to the next.
BUY-TO-LET the Ramsay case The UTT in Elizabeth Moyne Ramsay v HMRC allowed Mrs Ramsay incorporation relief on the transfer of her property letting business to a company. It was decided that letting is a business, which is wider than a trade. Incorporation provides lower rates of tax (corporation v income), relief on mortgage interest for companies, and (if relief granted) no immediate CGT charge. However, CGT is payable on disposal of shares: the shares have an equivalent base cost to the base cost of the property. (If a property is sold, corporation tax payable only on the increase above market value since the transfer in.) SDLT on incorporation, but special partnership exemptions may apply.
Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.