Taxes to consider when investing in UK property from overseas

Britain is a destination of choice for many overseas investors looking for decent yields in a stable property market.

But in recent years, a cash-hungry government has looked to landlords at home and abroad to pay extra taxes.

It’s easy to overlook how much impact these taxes have on a property investment - so here’s a quick guide to what you should expect to pay on top of the asking price of a property in the UK.

The list is divided in to three - costs to enter the market, ongoing expenses and exit costs - and includes UK property tax on homes for foreigners.

Buying a property

Buying a home or a buy to let investment comes with some extra costs -

Stamp duty land tax (SDLT) - often just called stamp duty - is paid depending on the purchase price of the property and if you are intending to live there or use the property as a second home or for renting out.

First time buyers purchasing their main home also qualify for discounts.

SDLT - Buying your main home

Source: HMRC

Example: A freehold property valued at £500,000 attracts SDLT calculated like this:

£0 - £125,000 = 0% = £0

£125,001 - £250,000 = £125,000 x 2% = £2,500

£250,001 - £500,000 = £250,000 x 5% = £12,500

Total SDLT = £15,000

SDLT - Buying a second home or home to rent out

Source: HMRC

Example: SDLT on a £500,000 property bought as a buy to let rental works out like this:

£0 - £125,000 = £125,000 x 3% = £3,750

£125,001 - £250,000 = £125,000 x 5% = £6,250

£250,001 - £500,000 = £250,000 x 8% = £20,000

Total SDLT = £30,000

The rates for properties bought by companies differ from the personal rates in these tables. Special rates also apply to portfolio purchases of six or more properties.

Other purchase costs

Don’t forget to add in legal fees and any charges linked to mortgage borrowing.

Ongoing taxes

Once you have a property, some ongoing costs apply on top of the usual day-to-day running costs.

Income tax

Income tax will apply on rental profits - the amount left when you have deducted any allowable expenses or allowances from the rent received, ignoring mortgage or other loan interest.

If you have a mortgage or pay interest on a loan on the home, you can subtract some of the interest as an allowable expense, but the amount will reduce over the next few years to a universal tax deduction of 20% of mortgage interest paid from April 2020.

Higher or additional rate taxpayers will not get what they pay in mortgage interest as a tax deduction - only a credit of 20%.

This could push some basic rate taxpayers into a higher bracket as they will have to declare income offset for tax now as rental profit in the future.

 Source: HMRC

Annual Tax on Enveloped Dwellings (ATED)

ATED is a tax paid every year by companies that own homes in the UK with a value of more than £500,000.

The rates for 2018-19 are:

Source: HMRC

Exit taxes

Capital gains tax (CGT) is paid on the disposal of residential property other than a main home in the UK.

The gain is the increase in the property value less the purchase price and some statutory expenses. Non-residents do not qualify for any annual exempt amount if they are non-domiciled in the UK.

Any tax must be paid within 30 days of completion of the disposal - a sale, gift or transfer of the property.

HMRC has an online CGT calculator for non-residents

The statutory expenses cover:

• Property purchase costs, for example, legal fees and SDLT
• Improvement costs, providing the improvement is still in place on disposal of the property. Improvement costs would include spending that adds value to the property, like installing central heating or adding an extension
• Costs of defending the title - these would cover legal fees and professional witness costs etc if the title to the property was disputed, for instance in a disagreement over boundaries
• Disposal costs, for example, estate agent costs and legal fees

The annual exempt amount is like the income tax personal allowance - an amount free of CGT per person each year.

For 2018-19, the exempt amount for foreigners that qualify is £11,700.

CGT rates for individuals in 2018-19 are:

• 18% and 28% for individuals 
• 28% on property where ATED is paid - the annual exempt amount does not apply

Basic rate tax payers are charged CGT at 18% up to an amount of gain equal to their unused income tax basic rate band and at 28% on any amount above this.

Higher rate tax payers pay CGT at 28%.

Inheritance tax for non-domiciliaries

Where it was common for foreign investors to hold their UK property in offshore structures such as a Special Purpose Vehicle (SPV), this no longer offers the shelter from IHT as it once did due to changes brought in by the Government last year.

Non-resident, non-domicile investors therefore need to reassess their situation and take the necessary steps to reduce their tax liability.

Trusts remain an option to address this issue, but the ongoing fees of 6% on the asset every 10 years will need to be compared to the cost of a variable universal life policy, which in many cases is a more cost-effective solution.

Read more on inheritance tax issues and opportunities for non-domiciliaries.

What next?

Arrange a meeting with a financial adviser before purchasing a property to ensure all aspects have been considered. It is also important to review your current financial situation and assess your tax liability.