Two tax changes affecting British property owners who live abroad will come into effect next month [1 April 2016]. The first will increase the land tax paid by expats acquiring a second UK residential property. The other is a hike in ”landlord mansion tax” affecting expats who own UK properties through companies. Tax expert Laurence Lancaster explains what is happening and what measures you can take:
Stamp Duty Land Tax (SDLT)
At the moment SDLT can be as high as 12 per cent where a property is acquired for more than £1.5m. For example, if an individual buys a UK property for £3m, they pay SDLT at different rates on the first £1.5m, with the remaining £1.5m taxed at the highest rate of 12 per cent. From April 1 this person would pay £90,000 extra in SDLT.
It is not only investors in high value UK residential property that are affected by this rate increase: any property purchased for more than £50,000 will be subject to the extra 3 per cent.
Annual Tax on Enveloped Dwellings (ATED)
This is effectively a mansion tax that applies to companies which own UK property that is not let out. Any expat who still holds a UK property in a company could be affected by the widening of the ATED annual charge. The charge originally applied only to properties which were worth more than £2m; from April it will apply to properties worth £500,000 or more. The new charge will be £3,500 per year for properties worth more than £500,000 but less than £1m.
What should you do if you are affected by the SDLT surcharge?
The best advice is to complete on the purchase before April 1 2016. As long as you complete before then, the extra charge cannot apply. If this is not possible then what are the options?
The extra charge will not apply as long as the UK property the expat is buying is their only UK property. So if they were to sell their existing property and then buy a new investment property there would be no 3 per cent charge as long as they did not own any other UK property on the day of the new purchase.
But if they retain one or more UK properties at the time of the new purchase they will be subject to the extra 3 per cent rate. Married couples are allowed to have just one property between them so any purchase of a UK property will attract the 3 per cent charge if it results in the married couple owning two or more UK properties.
One option is to invest in UK property via other family members. If the non-resident investor is also non-UK domiciled they are free to make cash gifts to any of their children or grandchildren without any UK tax issue arising from the gift.
The recipient of the gift would then be free to buy a UK property without the 3 per cent rate applying as long as it was their only UK property. If the expat is still UK domiciled then making cash gifts to children or grandchildren will not cause any UK inheritance tax (IHT) problem providing they survive for seven years from the date of making the gift.
For those expats that are non-UK domiciled, the better option is likely to be to set up a trust for their child / grandchild and for the trust to buy the property.
HMRC has confirmed that if the trust is set up for the main benefit of one beneficiary then the 3 per cent rate will not apply as long as the property is the beneficiary’s only UK property. Unlike direct ownership, the trust can be structured so that it is not subject to UK IHT on the beneficiary’s death.
What if you are affected by the new ATED charge?
If the property is let out to a person who is not connected to the owner of the company (e.g. not their son or daughter) then there should be no charge. However the company must file a return to claim the relief from this charge. The return must be filed by April 30 2016.
The best advice is likely to be to move the property out of the company as soon as possible as the ATED charge is only likely to rise over time. Advice should be taken by any expat considering this move but the tax charges should not be too severe as long as the property is not mortgaged.
• Laurence Lancaster is a barrister and group tax counsel for the Sovereign Group (sovereigngroup.com)
Source: The Telegraph