UK Residential Property Alert: Cold Hospitality for Nonresidents

Pundits hailed the recent Tory election as the dawn of a new U.K. property boom --  fuelled in part by nonresident investors. 

But nonresidents contemplating a bijoux apartment in Mayfair, or a Cornish hobby farm should consider the risks entailed by increasingly harsh rules, warns Charles Goddard, a partner with Rosetta Tax LLP in a recent article for BBNA Tax Planning International Review.

In Tax Problems Ahead for U.K. Residential Property Investors, Goddard discusses a number of red flags for nonresident investors.  There are no one-size-fits-all solutions, he writes, but rather, each prospective investor must tally the costs and benefits based on his particular circumstances and concerns, bearing in mind that: 

  • The U.K. levies a 40 percent inheritance tax on U.K. assets of nonresidents.
  • In the past, the U.K. did not impose capital gains tax on disposals of residential property by nonresidents.  As of April 2015, however, such disposals are now chargeable.  The nonresident may be able to claim principal private residence relief on a disposal, but the requirements are strict, including, generally, spending 90 days in the property in the tax year, and complying with onerous record keeping requirements. 
  • Traditionally, nonresidents have avoided inheritance tax and capital gains on dispositions by acquiring property through a holding company registered in a foreign tax haven. This option has now been rendered more costly, however, because the government introduced an “annual tax on enveloped dwellings” (ATED) in 2013 – generally, applicable to companies holding residential property that a connected individual has the right to occupy. Initially, these rules only applied to properties whose value exceeded GBP2 million, but this threshold has been reduced to GBP500,000 as of April 1, 2016, even as government increased the ATED tax rate by 50 percent from April 1, 2015. For the chargeable period from April 1, 2015 – March 31, 2016, ATED is imposed in an amount of GBP7000 – GBP218,200, depending on the value of the property, and further increases are anticipated.
  • Companies liable for ATED are also subject to capital gains tax at 28 percent rates on gain accrued on a disposal since the company entered the ATED regime. Nonresidents are likely to trigger this gain if they 'de-envelop' properties they hold through foreign holding companies by transferring them to personal ownership – and capital gains tax may bite all the harder in view of the post-election fever spike in property value. 

These considerations may prompt even the most committed Anglophile to pause for thought before clicking the ‘Add to Cart’ button on  What’s more, the new rules may present even more complicated challenges for nonresidents who have already invested in U.K. property in reliance on a prior, gentler regime. Their challenges are not unlike those faced by the many Brits who secured themselves a little slice of the Med only to beat a hasty retreat upon discovering the regulatory and tax risks of investing in a country where you have no leverage as a voter. 

Tax Problems Ahead for U.K. Residential Property Investors, by Charles Goddard, is published in the June, 2015 issue of BBNA Tax Planning International Review, and is available by subscription through the BBNA Premier International Tax Library. 

By Joanna Norland, Technical Tax Editor, VAT Navigator