Article by Adrian Benosiglio, RSM (United Kingdom).
Overseas investors continue to look to the UK as an attractive location to invest. But what are the key tax implications?
Stamp Duty Land Tax (SDLT)
SDLT is payable at a rate of up to 4 per cent on the purchase of commercial property. Where a company holding UK property is acquired, SDLT may not be payable. Financial and tax due diligence should be undertaken before acquiring an existing company. The buyer’s lawyers will usually submit the SDLT return and make any payments.
Taxation of rental income
Net rental profits are subject to income tax at a rate of 20 per cent for companies and up to 45 per cent for individuals. These profits are calculated in line with accounting standards. However, deductions may be restricted for capital expenditure and connected party transactions which are not provided on an arm’s length basis.
Taxation of capital gains
Capital gains realised by non-resident investors on commercial real estate is generally tax free. Although care needs to be taken if the real estate is used in a UK trade carried on by the investor or if there are UK resident investors in the structure.
Inheritance tax (IHT)
UK domiciled and deemed domiciled individuals are subject to UK IHT at a rate of 40 per cent. Non domiciled individuals are also subject to IHT at a rate of 40 per cent on their UK sited assets. This includes UK commercial property. Shares in non-resident companies (holding UK real estate) are generally not UK sited assets and therefore, if held by a non-domiciled individual will not be subject to IHT on their death.
Deductions are available for third party finance costs and connected party loans to the extent that they are provided on arm’s length terms. Restrictions may arise on a refinance.
Withholding tax, however, is required to be paid over to the UK tax authorities at a rate of 20 per cent on interest payment arising from UK sited loans. It may be possible to structure loans so that they are not subject to UK withholding tax.
Depreciation is not an allowable deduction in calculating taxable profits. However, allowances are available for certain capital expenditure in the form of capital allowances. These allowances can reduce an investor’s exposure to UK income tax. When acquiring a property or carrying out refurbishment, advice should be taken to ensure that capital allowance claims are maximised, which will have an impact on the value of a property.
Value Added Tax (VAT)
VAT is based on the location of property and not where an investor resides. Therefore, if a vendor is required to charge VAT on the sale or lease of commercial property the investor will need to factor this into his cash flow and or cost projections. However, where a vendor has opted to charge VAT but the property is let to tenants or agreed to be let to tenants potentially it can be acquired without VAT being chargeable to the purchaser. However, there are very specific rules that must be followed in these cases.
Where an investor has acquired a commercial property they can normally choose register for UK VAT as an overseas taxable person and elect and charge VAT both in respect of the rents and on any sale proceeds. This should entitle him to recover VAT incurred on the purchase and on on-going expenditure relating to the property. Where a property is used for both commercial and residential purposes extra care needs to be taken to identify additional VAT issues.
The UK standard rate of VAT is 20 per cent and VAT returns are typically three month periods with submission the 7th day of the second month following the end of the VAT period.
A company is tax resident in the UK if it is either incorporated or managed and controlled in the UK. It is therefore essential that these conditions do not apply if a company is to maintain the benefits of its non-resident status. When acquiring a non-resident company, a review of its status should be undertaken.
Dealing or developing UK land
Dealers or developers in UK land can be subject to UK income or corporation tax on their profits. Certain jurisdictions have treaties with the UK which may mean that these profits are not subject to UK tax. Where there is such activity, appropriate advice should be taken to ensure that the risks of unexpected tax charges are managed and appropriate filings are submitted to the relevant tax authorities.
Direct tax compliance
The UK tax period runs to 5 April each year. An annual income tax return is required to be submitted by 31 January following that year. Tax payments are due on 31 January within the tax year and then on 31 July and 31 August following the tax year.
Unless an offshore investor is registered under the non-resident landlord scheme (NRLS), the agent or tenant is also required to withhold 20 per cent of any rental payments to the landlord. A tax return is then required to be submitted, which will reclaim any overpaid tax. This can result in a cash flow disadvantage.
How RSM can help
We can advise on the acquisition of new properties and companies, refinancing, compliance and assist with disposals. We can also assist the investors with their personal tax planning and compliance.
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