A number of changes have recently been made to the UK Tax regime for buying and selling residential property. Below we summarize the main changes.
Non-residents Capital Gains Tax rules
There rules are in effect from April 2015 and according to the provisions of the legislation, all non-residents will be subject to UK capital gains tax on gains arising post 5 April 2015 on the disposal of UK residential property. The tax rates that apply under this rule are as follows:
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Companies: 20% (that are not exempt companies)
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Individuals: 18% or 28% depending on whether the individual is a basic or higher rate taxpayer
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Trustees and personal representatives: 18%
Exempted entities or entities who can claim exemption are: charities, certain investment trusts and venture capital trusts, registered pension schemes, diversely held companies, certain unit trusts and open-ended investment companies, certain schemes which have or include investors which are offshore funds and companies that deal with life assurance. Reliefs can also be available for certain companies.
Restriction on interest deductions on purchases of buy-to-let properties
Restrictions of relief for finance costs on let residential properties will be gradually introduced from 6 April 2017. Finance costs include: mortgage interest, sums which are equivalent to interest and the incidental costs of obtaining finance by means of the loan, for example the fees incurred when taking out or repaying mortgages or loans. The current deduction for higher rate tax relief on finance costs will be restricted in the following way:
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tax year 2017 to 2018: the deduction from property income will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate reduction
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tax year 2018 to 2019: the deduction from property income will be reduced to 50% of finance costs and 50% will be given as a basic rate reduction
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tax year 2019 to 2020 the deduction from property income will be reduces to 25% of finance costs and 75% will be given as a basic rate reduction
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tax year 2020 to 2021 no deduction for higher rate tax on finance costs will be available and all financing costs incurred by a landlord will be given as a basic rate reduction
Changes concerning foreign domiciled persons owning (directly or indirectly) UK real estate
From April 2017, all residential property held directly or indirectly by foreign domiciled persons will be subject to Inheritance Tax, even when the property is owned through an indirect structure such as an offshore company or partnership. As a result, foreign domiciled persons can be liable to pay a 40% tax in respect to the market value of UK residential properties held by them on their death.
Additional 3% Stamp Duty Land Tax
An additional rate of 3% will apply to purchases of second homes from 1 April 2016.
Source: Ray Smith, Alexandra Wood, Mondaq, 9 February 2016.