United Kingdom

UK Residential Property 

UK residential property ownership has become an essential area in which to ensure you fully understand your tax position.
Residential property

The taxation of UK residential property has seen significant changes in recent years. While the picture as to winners and losers is not straightforward, typically the tax cost and complexity associated with owning higher value residential properties in the UK has increased. This is especially so for home owners who are either not domiciled or not resident in the UK.

 

The UK taxes to consider are presently:

 

 

Stamp duty land tax (SDLT)

 

SDLT is paid by the buyer on the acquisition of the property at rates prevailing at acquisition. The rates have been radically reformed with effect from 4 December 2014. Further information is included in our KPMG commentary on the 2014 Autumn Statement.

 

In addition, a special rate of 15% was introduced on 22 March 2012. The rules are complex but broadly the rate applies when companies and certain other vehicles buy residential property worth over £500,000 typically for someone connected with them to use as their home. This flat rate will continue to apply to such transactions, rather than the new progressive rates introduced for other transactions from 4 December 2014.

 

In Scotland SDLT will be replaced by the Land and Buildings Transaction Tax (LBTT).  This will impact all potential purchasers of land or property in Scotland concluding on or after 1 April 2015. LBTT has different rates to SDLT.  Further information is included on our Evolving Landscapes: devolved taxes in Scotland web page

 

Capital gains tax (CGT)

 

UK resident taxpayers have long had to consider whether they have a CGT liability (or a corporation tax liability on capital gains) when they realise a profit on the disposal of residential property in the UK.

 

However, where the owner is an individual (and in certain circumstances trustees and personal representatives), there is the potential for relief from CGT on the sale of their only or main residence. Where an individual has lived in the property from the date of purchase to the date of sale, any gain arising on the sale is normally covered by Principal Private Residence relief (PPR) and fully exempt from CGT.

 

Non-UK residents have historically not generally been liable for CGT on sales of UK residential property under UK tax rules, in contrast with the tax systems of many other countries. However from 6 April 2013 rules have been gradually introduced which extend the scope of CGT to include non UK resident taxpayers. Initially only companies and certain other vehicles were subject to this tax and only with respect to gains on higher value residential properties typically used by someone connected with them as their home.

 

From 6 April 2015 the scope of CGT will be extended to tax capital gains realised by further classes of non-UK residents, including individuals, disposing of UK residential property, regardless of their value or usage. This latest extension will apply to capital gains accruing post 6 April 2015 on disposals of residential property located in the UK. Most types of communal property are excluded from the charge. The rules predating this extension largely continue to apply in parallel, which creates considerable complexity. This includes rules in place which seek to ensure that tax is not paid more than once on a given element of gain.

 

PPR has also been reformed in recent years to reduce its scope. Taxpayers with more than one residence are still able to elect to choose which residence is their main residence for PPR, provided that they meet the necessary conditions. However, from 6 April 2015 it will become more unusual for UK resident taxpayers to receive relief on disposals of non UK homes and for non UK resident taxpayers to receive relief on the disposal of homes in the UK. This is because the relief will require the individual to meet a “day count test” in relation to the residence for each tax year for which it is claimed. Broadly, the “day count test” will be met if the individual or their spouse/civil partner spend at least 90 midnights in the property in the tax year.

 

Further information is included in our KPMG commentary on the Finance Bill 2015 draft clauses which covers Changes to Principal Private Residence relief and UK residential Property – Capital Gains Tax for non UK residents. If these new rules could affect you, please call your usual KPMG Private Client contact.

 

Annual Tax on Enveloped Dwellings (ATED)

 

The ATED is a relatively new tax, introduced with effect from 1 April 2013. The rules are complex but broadly the ATED is an annual tax charge which applies while companies and certain other vehicles hold higher value residential property typically for someone connected with them to use as their home. The value threshold at which the charge applies to a property will reduce next year and the year after that. The threshold was £2 million from 1 April 2013, but will fall to £1 million from 1 April 2015 and £500,000 from 1 April 2016.

 

Where the charge applies, the owner needs to file an ATED return with HM Revenue & Customs (HMRC) every year.

 

It was announced in the recent 2014 Autumn Statement that the rates of ATED charges will be increased by more than 50%, as shown below:

 

ATED charges  

Value of UK residential property

Annual charge for the period ended 31 March 2015

Annual charge for the period ended 31 March 2016

Annual charge for the period ended 31 March 2017

Over £500,000 up to £1 million

-

-

£3,500

Over £1 million to £2 million

-

£7,000

£7,000 + CPI

Over £2 million to £5 million

£15,400

£23,350

£23,350 + CPI

Over £5 million to £10 million

£35,900

£54,450

£54,450 + CPI

Over £10 million to £20 million

£71,850

£109,050

£109,050 + CPI

Over £20 million

 

£143,750

£218,200

£218,200 + CPI

 

 

Inheritance tax

 

Inheritance tax can apply at up to 40% on death or on certain transactions such as gifting of property to trusts. Where an individual owns UK residential property directly these charges may apply regardless of where the individual is resident or domiciled. There may be debt which should be deducted from the value subject to IHT, depending on the circumstances.

 

Income tax

 

Income tax (and corporation tax on income) are typically payable on rental profits or development profits but may also apply in other circumstances.

 

Council tax

 

Council tax is collected from occupiers by local authorities.

 

Mansion tax

 

There is no Mansion Tax at present but there is some expectation that a Mansion Tax may be introduced in the UK in the future.

 

What action should you now consider taking?

 

Each of the above taxes brings its own complexities and compliance burden which need to be understood.

 

Individuals who hold higher value properties or second homes, directly or through trusts and companies, typically need to take into account the overall effect of these taxes.  In practice there will be a range of possible outcomes and it will be necessary to consider both the objectives and circumstances of the individual (see for example, comments on using untaxed foreign income or gains as security for loans used in the UK on our Hot topics for non doms web page) and all of the relevant facts.

 

Understanding the aims and requirements of the property owner are key to providing the most suitable advice. For example, is the property intended to be used as a long-term family residence or is it more of a shorter term investment?

 

If you already own UK residential property or you wish make such an acquisition, these rules could affect you. Please call your usual KPMG Private Client contact.

Contact us

Mike Walker

Mike Walker

Partner

KPMG in the UK

020 7311 8620

mike.walker@kpmg.co.uk

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