Tax planning when investing in UK property
We're often asked for tax structure where a UK non-resident and non-domiciled individual wishes to purchase a UK property. In this article we look at some of the tax planning issues and opportunities available.
Jack is resident and domiciled in Spain. He has relatives in the UK and is interested in purchasing a property here because (a) he wants somewhere to stay when he visits and (b) he has heard that UK property prices are set to rise.
The question is, how from a tax perspective should he structure the purchase?
There are broadly two ways to buy the property:
DIRECT OWNERSHIP
Capital Gains Tax
From a capital gains tax perspective direct ownership is potentially attractive:
Inheritance Tax
The inheritance tax position is, however, not as good. The holding of property in the UK would mean that Jack has a UK estate and, as well as probate being required on his death, the house would be subject to inheritance tax to the extent that the value exceeds the £325,000 nil rate band. As the value of the property is expected to rise rapidly, this could result in a significant tax bill were he to die while still owning the asset. There are, however, a number of methods available to Jack to reduce or eliminate any inheritance tax charge:
Use of Multiple Ownership
The property could be acquired in multiple ownership. For example, Jack, his wife and children could all own the property jointly.
Provided the individuals have no other UK assets, it is likely that each share will be below the nil rate band.
In order to avoid problems with the 'gift with reservation of benefit' legislation, it is necessary to gift cash to the family members, which they can then use to purchase their shares of the property.
The gift with reservation of benefit (GROB) provisions apply to property in particular, where an interest in a property is given away, yet the person gifting the interest still continues to reside in the property. For inheritance tax purposes, the whole value of the property is still regarded as included in the occupier's estate for inheritance tax purposes.
Gifting of Property
Another solution would be to gift cash to a younger member of the family who can then make the acquisition. The gift will be exempt from inheritance tax, provided the person making the gift survives seven years. The above GROB rules would not apply as the gift was a cash gift. The UK pre-owned assets tax charge should also not be relevant if Jack is non-UK resident.
The property will then belong to the donee (the younger family member) and if the donee were to die, it would be included in his estate for inheritance tax purposes.
Mortgages
The value of an individual's estate is essentially the market value of the assets at the date of death, less any liabilities outstanding at the date of death.
It is therefore possible to effectively reduce any inheritance tax charge to zero by obtaining a substantial loan against the value of the property. Provided the mortgage reduces the 'net value' of the property to below the nil rate band (currently £325,000), there will be no inheritance tax payable.
The mortgage funds obtained can be invested overseas and any interest return would then be exempt from UK income tax provided the interest income is not remitted to the UK.
USING A TRUST TO OWN THE PROPERTY
Capital Gains Tax
The Principal Private Residence relief is extended to situations where a beneficiary is entitled to occupy a house under the terms of a trust deed. In these circumstances, the trustees would be able to claim PPR relief when they sell the property.
In the case of a non-UK domiciliary, as the trustees are non-resident they would not, in any case, be liable to UK capital gains tax.
It would only be if the settlor of the trust (or his close family) was also a beneficiary and became UK resident that the gains of the trust could be attributed to him under the anti-avoidance provisions.
Inheritance Tax
The trust will be subject to special inheritance tax rules. One of the key implications is that it could be subject to an inheritance tax charge every 10 years starting with the date of commencement.
USING AN OFFSHORE COMPANY
The property could be owned by a non-resident company. In this case the non-domiciliary would own the shares in the company.
As the shares are non-UK property, they would be exempt from inheritance tax. Key risks with this are:
In this book we look at a variety of tax planning strategies that arise from the terms of the UK's double tax treaties. This book is updated for the 2022 changes....keep reading
For many people the family home is the most valuable asset they have. As such protecting its value will be of key importance. In this tax guide we look at the key tax planning opportunities for the family home and private residences....keep reading
This brand new (December 2022) edition of our best selling offshore tax planning book tells you what you need to know to take advantage of offshore opportunities and slash your UK tax bill. It's a pretty comprehensive look at plenty of UK and offshore tax planning techniques including residence, domicile, emigration, using offshore companies and trusts, buying property overseas and much more....keep reading
Inheritance tax is a particularly nasty tax as it's a tax on your capital that you've accumulated from your after tax earnings. In this book we look at some of the top ways you can legally reduce your inheritance tax liability....keep reading
This book looks at a number of tax planning issues for company owners and considers both corporate and personal tax planning opportunities available. It is updated for the latest changes for 2022/2023....keep reading
Buy-To-Let ("BTL") landlords have to consider Income Tax, Capital Gains Tax, Inheritance Tax and Stamp Duty Land Tax on their property holdings. In this book we look at tax planning techniques that all BTL landlords can consider to reduce the amount of these taxes they pay....keep reading
This guide is essential reading for anyone providing digital or online supplies of goods and services. It looks at the international tax treatment from both an income tax/corporate perspective as well as VAT/GST....keep reading
The aim of this guide is to give context to the considerations for 99% of international tax planning scenarios. Without understanding the information contained here, you will find it very difficult to apply or structure any kind of tax planning to your international transactions/assets....keep reading
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
=============================================================
Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.