WHAT TAXES DO FOREIGNERS PAY WHEN BUYING OR SELLING A UK PROPERTY?

The UK has clear tax regulations if you are a non-resident buying a property to rent it out. Additionally, you could be liable to pay tax if you sell the property and make a capital gain. These are the main taxes you should be aware of when purchasing or selling a property in the UK.

STAMP DUTY LAND TAX (SDLT)

All buyers must pay this registration tax to purchase a property. It is set in a tier system with price brackets and increasing tax rates for higher values. The recent increase in the SDLT has impacted all property purchases. Non-residents, businesses, and trustees will pay an additional 2% SDLT on residential property purchases starting 1 April 2021. You may be exempt if you are in a lettings business or a developer. There is an additional 3% surcharge if you buy to let the property.

If you purchase a property from a company whose value exceeds £500,000, a 15% SDLT flat rate will be applied. You may be eligible for exemptions, such as when the purchase is made for renting as part of a rental business or property trading/ development business.

If you purchase shares in a property holding company, SDLT is not payable. However, there are some drawbacks to investing in said company that you should discuss with your tax advisor, one of which is ATED (Annual Tax on Enveloped Dwellings).

CAPITAL GAINS TAX

This is due at a rate of 28% on any profits realised on the sale of residential property by all sellers. An exemption is possible on the disposal of your only or main residence by gift or sale. Individuals are eligible for this, but companies are not.

INCOME TAX

If you purchase a property to rent out, a 20% withholding tax is charged from the landlord’s gross annual rental revenue from the property. To avoid paying this additional tax, the individual must register with HMRC under the Non-Resident Landlord Scheme and receive the gross rental revenue once registered. They would be required to file a self-assessment form each year and pay income tax on the net rental profit at a rate of 20%.

INHERITANCE TAX

Regardless of your resident status, you will be subject to inheritance tax if you purchase a residential property in the UK. On your demise, a 40% inheritance tax is payable on the value of all UK assets. The debts on the property may reduce the amount subject to inheritance tax. Property transferred between spouses is usually exempt and subject to limitations when you pass the property to the surviving spouse, a non-UK domiciled individual.

By procuring a mortgage on the property at the time of purchase, you can limit your liability to inheritance tax. You may also seek life insurance to cover any inheritance tax liability associated with the property’s equity.

We always recommend speaking to a tax advisor or accountant to understand how to structure your purchases. We have partners whom we are happy to introduce you to for a conversation.