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A look at the tax implications of holding UK residential property

Monday 12 December 2016
A look at the tax implications of holding UK residential property

In preparation for tax reforms due in April 2017, many owners of UK residential property are (or should be) looking at their assets and reassessing them to ensure they are not caught up by the new rules.

The significant changes around UK non-domiciled individuals and inheritance tax on UK residential property are clear, however, to illustrate the implications of holding UK property in offshore structures we have set out four scenarios based on the options open to an example property owner.

Background

A UK resident individual owns a London residential property that in 2016 is valued at £1 million. The property was purchased for £500,000 in 2006. It was valued at £860,000 in April 2015. The owner currently receives £40,000 per annum in rental income.

The options

Four scenarios relating to holding a UK residential property valued at £1million

(click image for PDF version)

UK property tax rules Alex Picot Trust-min.jpg

N.B. the tax rates used are in respect of 2016/17. Approximate calculations have been performed in order to quantify the tax impact of the different structures. Our usual Terms & Conditions apply, see our website for more details: http://alexpicottrust.com/legal-notice/


The four scenarios explained

Scenario 1: UK individual owns UK residential property

In this scenario if the property is rented out, the owner will pay income tax of £16,000 per year. (UK higher rate taxpayers are subject to income tax at a rate of 40%. Property expenses could be deducted which would reduce the taxable income.)

If the property is not rented out, there would be no ATED (Annual Tax on Enveloped Dwellings) as this does not apply to individuals.

If the property is sold, capital gains tax of £136,892.

Higher rate taxpayers are subject to CGT at a rate of 28% on proceeds less gain, less the annual exempt amount and any disposal costs. CGT is 20% for all other chargeable assets.

If the individual died, inheritance tax of £270,000.

This is calculated on the value of the property less the nil rate band of £325,000.

 

Scenario 2: Jersey company owns UK residential property

If the property is rented out, expect income tax of £8,000 per year.

Companies that are taxed under the non-resident landlord scheme are subject to income tax at a rate of 20%. Property expenses could be deducted which would reduce the taxable income.

If the property was not rented out to an unconnected third party at full market rate, it would be subject to ATED at £7,000 per year.

If the property is sold, non-resident capital gains tax of £32,000.

Companies are subject to non-resident capital gains tax at a rate of 20%. They are allowed a rebasing of UK property to their April 2015 value. Companies also benefit from indexation which has not been included in the calculation.

If the individual died, inheritance tax of £270,000.

The company forms part of an individual’s death estate. This is calculated on the value of the shares less the nil rate band of £325,000.

 

Scenario 3: Jersey trust owns UK property

If the property is rented out, income tax of £18,000 per year.

Discretionary trusts are subject to income tax at a rate of 45%. If the trust was an interest in possession, it would be subject to tax at a rate of 20%. Property expenses could be deducted which would reduce the taxable income.

If the property was not rented out, there would be no ATED as this doesn’t not apply to trusts.

If the property is sold, non-resident capital gains tax of £32,000.

Trusts are subject to non-resident capital gains tax at a rate of 20%. They are allowed a rebasing of UK property to their April 2015 value. Companies also benefit from indexation which has not been included in the calculation.

If the individual died, inheritance tax of £270,000 if they were not excluded as a beneficiary. Inheritance tax of nil if the individual was excluded from benefit. Assets in a trust form part of the settlor’s death estate.

Once the settlor has died, the property can remain in the trust and passed down the generations free of IHT.

Every ten years, the trust would be subject to an IHT charge, calculated as £40,500.

The 10-year charge is calculated as 6% on the value of the UK property less the nil rate band A full nil rate band can be used at every anniversary.

 

Scenario 4: UK property owned by Trust & Company, where the Settlor is deceased

The property is held in a Trust & Company structure forming part of the settlor’s death estate.

If the property is rented out, income tax of £8,000 per year.

If the property was not rented out, ATED would be calculated at £7,000.

If the property is sold, non-resident capital gains tax of £32,000.

Trusts are subject to non-resident capital gains tax at a rate of 20%. They are allowed a rebasing of UK property to their April 2015 value. Companies also benefit from indexation which has not been included in the calculation.

Every ten years, the trust is subject to an IHT charge (annualised) calculated as £40,500.

The 10-year charge is calculated as 6% on the value of the UK property less the nil rate band. A full nil rate band can be used at every anniversary. 


Our expert Jersey team at Alex Picot Trust are ready to help clients with UK property to understand the new rules, assess the impact, and prepare and implement a planning strategy ahead of April 2017.

For further clarification on any of the scenarios or to discuss the options in more detail, please contact our Tax Consultant Hannah Roynon-Jones Hannah.roynon-jones@alexpicottrust.com