The United Kingdom continues to be a sought out destination for purchasing property. People are drawn to its diverse culture, business opportunities, and education options. This being said, many people opt to purchase properties for various reasons, a permanent home, investment, holiday home, or somewhere to stay while on business. Before one purchases in this popular destination, there are many things to be considered, mainly the tax implications.
When purchasing property, paying tax is unavoidable. However, there are several options of purchasing that may affect how much tax you pay. The most appropriate option depends on a number of factors such as, whether residential or commercial real estate is being purchased, private or trust purchase, investment through a registered company or purchasing via a pension or CIS scheme.
Here is a summary of each purchasing option, and their tax implications.
1. Purchasing in your name
Purchasing property in your own name has become the most popular option of purchase when it comes to first or second home owners. Anyone who buys property in the UK will pay a land transfer tax, which is often pretty low if buying in your name. This tax is called stamp duty land tax (SDLT). In instances of purchasing your first home under ￡500,000 the SDLT will be significantly lower than any other purchasing options.
If you purchase property in your name but as a gift for another, you will be required to pay inheritance tax (IHT). Gifts between spouses are usually exempt from IHT.
If the property was purchased as a buy-to-let, you will have to pay income tax on the rent received. This tax rate depends on one’s overall UK taxable income and can be as much as 45%.
2. Purchasing with a partner
There is the option of purchasing a property with two or more investors. This is a popular option for those who are wanting to establish a UK property business. If purchasing under this scheme, there are several partnership types to choose from. Limited partnership and limited liability partnerships allows the liabilities to creditors and others to be shared, similar to a company. However, each partner is taxed on their share of partnership assets and its capital and income profits as if they owned them personally.
3. Using a UK incorporated company
All UK corporated companies will be UK tax residents and pay corporation tax on their global capital and income profits. UK companies are required to pay SDLT on any UK residential properties. Employees of said company can be taxed on any benefit received from company owned assets. Non-UK resident shareholders of the company are not required to pay tax on the dividends however are subject to CGT on disposal of holdings over 25%.
Shares may be sold without SDLT, however 0.5% stamp duty will be paid to the buyer. IHT also needs to be paid for all shares of UK property, as well as paid for loans used to acquire the properties.
4. Purchasing via a trust
In the past, purchasing property under a trust was very advantageous when it came to UK taxes, however, this has subsequently changed. Trustees are subject to increasingly complex tax legislation. If a trust owns UK residential property, it is required to pay IHT. Additionally, IHT charges may occur if adding UK properties to a trust, while it is held by the trust and when it leaves the trust.
There are special IHT, income tax, capital gains tax and SDLT rules for trusts depending on whether anyone is entitled to occupy/ use trust-owned UK real estate or to any income generated by it.
5. Purchasing via a collective investment scheme (CIS)
A collective investment (CIS) scheme is an investment vehicle that allows investors to pool their money into a portfolio, sharing in the risk and return of the portfolio in proportion to their participatory interest in the portfolio. Some holdings in a non-UK CIS which invests in property may be exempt for IHT. They can be structured to be taxed like a company or like a partnership for income and gains tax purposes.
These CIS’s may be subject to high SDLT rates if they invest in high value residential property. If the CIS is non-UK, there is a 2% surcharge to the SDLT.