As a Non-UK resident, the most advisable investment structure for you would be through a Non-UK company. We have listed for you some advantages that would accrue from being a Non-UK resident making an investment in UK real estate under that structure :
- Any Non-UK company investing in the UK, regardless of its country of origin or registration, would be liable to pay rent tax at only 20% of the Net Rent Income irrespective of any tax treaty. This is a very beneficial Rent Tax.
- While traditionally the 20% withholding tax is deducted from Gross Rent before Net Rent is paid to a Non-UK resident, you still may obtain a clearance in advance from the HMRC for payment of Gross Rent to a non-resident company.
- When a Non-UK investor has acquired property in the UK through leverage or other ways to finance through debt, they are allowed payment of interest to that third party as a Tax Deductible Interest Expense. In addition, being regulated by the UK’s transfer pricing rules, interest on shareholder debt can be Tax Deductible as well. While a tax of 20% is withheld on interest paid to a non-resident, it is dependent on the specific debt financing structure and applicable tax treaty reliefs.
- If you decide to sell your UK property as a non-UK resident, there is NO Capital Gains Tax on that sale. Any profit realized when you’re selling UK Real Estate as a non-UK company is usually tax exempt. The sale of a non-UK company doesn’t require payment of tax on the gain in the UK, nor any other sort of UK transfer tax.
- You can claim Capital Allowances that will serve to decrease the amount of rental income, which doesn’t trigger any UK tax. Capital allowances are a depreciation allowance on machinery and plant that could be very advantageous. When it is deductible, the CA can be claimed depending on the type of plant and machinery when the acquisition price of Real Estate in the UK is affected.
- Stamp Duty Land Tax (SDLT) at a 4% rate is paid (more in the case of high-value residential property) as well as the VAT when it applies. Nevertheless, NO SDLT or any other UK transfer tax is to be paid on the sale of shares of your Non-UK company, which minimizes your transfer taxes significantly!
The purchase of UK real estate can be a complicated and tedious process, which requires that you pre-plan and consider certain issues; such as minimizing exposure to UK Taxes and ensuring that your structuring enables you to run your day-to-day operations as a Non-UK company or Investing Structure.
For this reason, we have listed some important issues that would need acknowledgement, in accordance with the points referred to above. We recommend that you seek professional assistance before undertaking an investment decision in UK Real Estate.
- In order to maintain Non-UK Tax Resident Status, your overseas investment entity should be directed and controlled from outside the UK. This normally requires that the majority of directors of this offshore entity should be Non-UK tax residents. All board meetings are to be held outside the UK.
- The Taxation schemes pointed up above applies to Non-UK resident companies who plan to acquire real estate in the UK as an investment. Profits are taxed differently when the company is a Real Estate developer or a trading company. The difference between investment and trading is very important. If the company is considered a trading company it could be subject to a :
- 20% Tax on all profits from trading in the UK, which include any Capital gains on sales of Real Estate
- 25% tax on Diverted Profits.
- If the real estate is sold after a short period from its purchase or development, this could be a real issue. However, substitute structuring can be managed if the purpose is trading. A Non-UK developer also needs to beware of anti-avoidance legislation, since the assessment of payable tax can include gains.
- Currently, the VAT rate stands at 20% and is charged on the purchase of Commercial Real Estate. The sale is considered as a transfer of a going concern if the property is let, which subjects it to a requirement to meet specific conditions. Vat is not payable in this situation which reduces both the SDLT costs AND the FUNDING costs.
- VAT is generally charged on rents from commercial tenants. You would not be expected to as commercial Real Estate owner in the UK to automatically require VAT on the sale price or rents: it is dependent on if you have opted to charge VAT or not.
- If the real estate owner does not ‘opt to tax’, the recovery of the VAT paid during purchasing, refurbishing or maintaining the real estate property is not possible. The paid VAT will be a sunk cost. This is only recommended if the landlord can bill higher rent and the additional rent adds to a loss due to any sunk cost of the VAT payment. As for charitable or residential purpose real estate, different rules apply. In order to make the wise decision, a case-specific counsel is to be requested.
- Many UK real estate investors choose to hold their investment through Offshore Unit Trusts. There is one principal difference between an Offshore Unit Trust and a Non-UK company. The first is generally perceived, for tax treatment purposes, as transparent for income taxation. Thus, the investor is a unit trust is taxed as if they are directly receiving their share of rents. This sort of structure is usually more attractive for UK Tax Exempt Investors due to the tax-free rent it allows unitholders. Such investors do not opt for holding real estate investments in the UK through a non-UK company, to be able to reclaim the 20% tax on rental income.
- There is always a risk that the investment property may have accumulated preexisting tax and liabilities, in the case an interest in UK real estate is obtained directly through shares or units. This means that proper due diligence would need to be carried out and instituted to compute and account for any risk that can be identified in the transaction.
We would be glad to provide you with a personalized and case-specific guidance if you are a Non-UK resident investor through our expert solicitors and tax advisers. We will define the exact tax treatment and applications, as well as recommend a proper structure for the acquisition.
