Published 1st August 2019
When you buy your UK investment property, you must consider the UK tax system and what it will expect from you. There are five taxes to consider:
1. Stamp Duty Land Tax (SDLT)
2. Income Tax
3. Capital Gains Tax (CGT)
4. Inheritance Tax (IHT)
5. Annual Tax on Enveloped Dwellings (ATED)
We also examine briefly ownership through a company.
• The UK tax year runs from 6th April to the following 5th April.
• The taxation authority in the UK is H.M. Revenue & Customs usually referred to as HMRC.
Hong Kong investors in UK property will be subject to UK tax. There is a tax on buying the property called Stamp Duty Land Tax or SDLT. There is a tax on the income earned by renting the property; this is Income Tax. If you die while you own UK property your UK estate is subject to Inheritance Tax or IHT. If you are fortunate enough to have invested in a property worth more than£500,000 you may be subject to Annual Tax on Enveloped Dwellings or ATED.
If you have a source of income in the UK you are obliged by law to register for UK tax and make annual UK tax returns whether any tax is due or not and regardless of whether the agent is deducting 20% or not, and regardless of your nationality.
The UK has the right to tax all income arising in the UK to Hong Kong residents. Article 21 of the Tax Treaty between the Hong Kong SAR and the UK provides that any UK tax suffered by a resident of Hong Kong SAR shall be allowed as a credit against the Hong Kong tax on the same income but if the UK tax exceeds the Hong Kong tax the excess is ignored.
SDLT is charged on the price paid for your investment property. It is normally calculated by your solicitor who will ask you for the tax, and complete the forms on your behalf. He will then submit the forms and pay the tax for you. If the cost of the property is under £40,000 then the SDLT is £nil. If the cost of the property is over£40,000 but under £125,000 the SDLT is 3% on the whole purchase price. If the cost of the property is over £125,000 but under £250,000 the SDLT is 3% on the first £125,000 and 5% on any part of the purchase price that is in excess of£125,000 and less than £250,000. The rates continue to climb as the price increases!
Income tax is a tax on income. Income includes the profit you make from letting your investment property. The profit is the rent payable by the tenant less allowable expenses such as agent’s fees maintenance finance costs etc. While you are in a period of guaranteed rent the profit will usually be the same as or very close to the guaranteed rent.
As an investor who lives overseas you are obliged to register for UK tax when you have a UK source of income regardless of whether you make any profit or not. The deadline for registering is 5th October following 5th April after your first UK property was first let. When you have registered for UK tax you will have to file a UK tax return each year.
The UK basic rate tax is 20% and applies to the first £37,500 of profit. However some Hong Kong residents may qualify for the first £12,500 of profit to be tax free and the next £37,500 to be taxed at 20%.Higher rates of tax apply on profit in excess of the basic rate band. Hong Kong residents who were British Dependent Territories citizens before the transfer of sovereignty to China on 30 June 1997, lost their entitlement to that status(and therefore to UK personal reliefs) from 1 July 1997. However, if they have registered as British Nationals (Overseas) or become British Overseas citizens or citizens of other Commonwealth countries they can continue to claim the reliefs including the Personal Allowance or nil rate band (£12,500 tax free).Also entitled to the Personal Allowance are all full UK citizens and all nationals of countries in the EEA, but not Chinese citizens since 2010.
Whether you have registered for UK tax or not, your letting agent will deduct 20% tax from your rent unless you also register in the Non-Resident Landlord Scheme (NRLS). This 20% is taken as being a payment on account of your UK tax liability. When you register in the NRLS, H.M. Revenue & Customs will send a letter to your letting agent saying that the agent can stop deducting the 20% tax. But you still have to file annual tax returns in the UK whether tax is due or not.
Capital Gains Tax is the tax due on the gain arising on the disposal of UK property.
There is a universal allowance of £12,000 of gains in any single UK tax year. If your aggregate UK gains do not exceed this figure and the gross sale proceeds does not exceed £48,000. But beware: there are special rules for calculating gains. (2019-20 rates)
Losses may be used to offset gains in the same year and any excess is carried forward to offset gains in future years.
A disposal by husband to wife or wife to husband is not taxable but the value when the transfer takes place is treated as the value when the donor acquired the asset.
For Hong Kong residents who dispose of UK residential property, tax is charged on the increase in value of the property either between the date of purchase and the date of disposal or if you owned the property at 5th April 2015 the increase in value of the residential property between 5th April 2015 and the date of disposal. There are several permitted methods of arriving at the value as at 5th April 2015 – you may choose that which gives the lowest tax payable.
Until 6th April 2019 Hong Kong residents are only subject to Capital Gains Tax (CGT) on the disposal of UK residential property. Gains made on disposals of other types of asset including commercial property are outside the scope of UK tax. Purpose built student accommodation is not usually classed as“residential property” for the purposes of CGT if the block comprises more than 15 bedrooms and is occupied by students for 165 days or more in the year for the purpose of taking a course in education. But this definition might not hold for some building configurations and HMRC is seeking to tax some arrangements by changing the definition.
After 5th April 2019 all gains on the disposal of any other property by non-residents (including student accommodation) is subject to Capital Gains Tax on the gain arising after that date. For Hong Kong residents who dispose of UK property or assets that are not residential property, tax is charged on the increase in value of the property either between the date of purchase and the date of disposal or if you owned the property at 5th April 2019 the increase in value of the residential property between 5th April 2019 and the date of disposal. There are several permitted methods of arriving at the value as at 5th April 2019 – you may choose that which gives the lowest tax payable.
All disposals of UK residential property must be reported to HMRC within 30 days of completion unless the taxpayer is registered for UK tax AND makes the transfer to his or her spouse. Failure to make such a return can be met with very high penalties. This was extended to include non-residential property after 5th April 2019.
IHT arises on the death of an owner of UK property and may also arise on some lifetime transfers. If you are not domiciled in the UK then only your UK estate will be subject to IHT but this may include some high value investments.
Transfers on death or during lifetime from husband to wife or wife to husband are exempt from UK IHT. There are also some smaller lifetime transfers that are also exempt from IHT but these are not likely to be of interest to non-residents.
IHT is a cumulative tax. The IHT threshold is £325,000 per person. Transfers in excess of that are taxed at 40%. The£325,000 is called the “nil rate band”. Any part of the nil rate band not used on the first death (of husband or wife) may be used on the second death.
Not only is IHT payable on death, some lifetime transfers may be subject to IHT. Lifetime transfers immediately subject to IHT include most of those involving transfers to Trusts. All other lifetime transfers are potentially exempt transfers –and will not incur IHT unless death occurs within seven years. If a lifetime transfer is a potentially exempt transfer then if death has not occurred within seven years the full £325,000 nil rate band is available again. There is a sliding scale where death occurs with the last four years of the seven year period.
Domicile is not the same as residency. Domicile has no legal definition but generally relates to the place of origin of your family, and for these purposes either it is in the UK or it is not. If HMRC challenge your Hong Kong or Chinese domicile they may look back several generations to see if there is a UK connection.
Property owned by small companies (both UK and overseas) may also now be subject to IHT on the death of an owner of the company.
The UK law relating to inheritance is quite unusual in that it allows a property owner to leave whatever he or she wants to anybody or anything. However that in the absence of an English Will the law is quite clear who will inherit – and this might not always suit you. Everyone who owns property in the UK is advised to visit a solicitor and make a Will.
ATED is a tax levied on some companies that are used to hold UK property valued at over£500,000. It applies equally to UK companies and overseas companies.
If you let the property and neither you nor your family ever uses the property you may claim full relief from the tax. But you have to claim the relief in the month of April every year. If you lose the entitlement to relief then fora UK property worth £500,000 to £1m at 5th April 2017 the tax is£3,650 per year. If the value of the property is higher, the tax increases sharply.
You might consider establishing a UK company and using it to buy UK property. This is only advantageous for a very small number of Hong Kong investors. The attraction is the low rate of tax(20%) on profits when personal owners will pay higher rates if profits exceed either£37,500 or £50,000. However if you want to draw the money from the company you will pay personal tax in addition to the company tax and will probably end up paying a lot more tax overall.
When you want the company to sell the property it will pay tax on the gain and you will pay tax again when you take the money from the company.
There is no relief from Hong Kong taxes for any UK tax paid by the UK company.
UK companies pay Corporation Tax and while the rules for calculating profit are similar to those used by an individual they are not the same. The biggest difference and the reason why so many have looked to use a UK company is that the treatment of loan interest is more beneficial if a company is used than if property is held personally. But the loan interest must be very substantial to outweigh disadvantages of using a company.
Because of the high demands for accounting and reporting as well as the more complex tax reporting, the running costs of a UK company can be quite high and this makes them unsuitable for small portfolios.
Using a UK company can work for a few people who have very high UK income and who want to accumulate value over along period of time. It also may be advantageous if you have very high borrowing used to purchase your UK property. For most this is not an advantageous route to follow.
See also the note on ATED above.
Until 5th April 2020 companies that are not UK companies and which hold UK investment property are taxed in the same way as individuals and pay UK income tax. From 5th April 2020 all non-resident companies will be subject to UK Corporation Tax rules.
From 5th April 2020 a company incorporated outside the UK will pay UK corporation tax on income (5th April 2019 for gains) and by 2020 the tax rate is expected to be less than 20%(the personal tax basic rate). What tax it pays in its country of incorporation depends where that is, and how withdrawals are taxed in the country of incorporation also depends on where it is. However a Hong Kong resident drawing money from a company will be subject to Hong Kong tax. Some types of income receive favourable treatment and you are advised to take advice locally.
While the Corporation Tax regime may look attractive for non-UK companies please remember that the company does not benefit from the personal allowance (first £12,000 tax free) and it may receive harsher treatment elsewhere. If you use a Hong Kong company to hold your UK property then the Tax Treaty between the two countries will offer the company similar protection to that offered to individuals. This is a complex area where one should consider the different rules for calculating profit, different reliefs and allowances, and different rules on the taxation of income drawn from the company.
The information contained in this newsletter is believed to be correct at the time of publication. The content of this newsletter is intended to be a brief summary of the principal points of the legislation or proposed legislation only, and it is provided for general guidance only. It may not take into account subsequent changes in the law and of necessity it omits much detail. Taxation is a complicated subject and is subject to change. You should only rely on advice prepared specifically for you. Neither the writer nor Landlords Tax Services Ltd can be held liable for any loss arising from any act or omission by you as a result of your understanding of this article. If the subject matter is of interest you should contact us to see if there is a relevant update, and to take professional advice which takes into account your circumstances.
Landlords Tax Services Ltd, specialises in the taxation of residential property income and gains and more than half its clients are resident outside the UK. If you would like specialist help contact Maurice Patry F.C.A .at firstname.lastname@example.org or for more information visit our website at Landlords Tax Services Ltd.
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