Tax implications for non-residents holding UK property

Stamp Duty Land Tax (SDLT)

SDLT is a tax paid by the buyer on the purchase of property / land. The rates of SDLT are increased when the purchaser is buying a second property / is a company, or a non-UK resident. In the case of a company, if the property will be subject to a charge to the annual tax on enveloped dwellings (read more here) a higher flat rate of 15% will apply. 

The effect is the SDLT charged on any residential property value over £1.5m will be from 12% up to 17% if the purchaser is buying a second home and is non-UK resident.

The deadline for filing an SDLT return and paying the SDLT in England and Northern Ireland is 14 days from the date of completion. 

There are different rates of SDLT for purchasing a commercial property. For full details of the rates of SDLT (LBTT in Scotland, LTT in Wales) see the BDO Tax Data Guide here.

Beneficial Ownership Register 

Beneficial ownership of UK land by non-residents must be registered:

• For individuals, the ownership is registered at the Land Registry.
• For overseas entities, the ownership is registered at Companies House – read more here.
• For trusts, the ownership is registered through the Trust Registration Service – read more here.

Rental income

Individuals are liable to income tax on any rental income received. Where a letting agent is used, they are required to deduct tax at 20% of the rental income less certain expenses before the rent is paid to a non-resident landlord. Where no letting agent is used, the onus to deduct tax at 20% falls on the tenant. To receive the rental income with no deduction of tax, the individual must register with HMRC under the Non-Resident Landlord scheme. BDO can assist with this registration: more information can be found here about how BDO can assist you with completing your tax return. 

Companies are liable to corporation tax on rental income - more information can be found here.

Annual Tax on Enveloped Dwellings (ATED)

In brief, ATED is an annual tax on residential properties held by ‘non-natural’ persons (i.e. this includes companies). It applies when the value of the property is more than £500,000. There are some reliefs and exemptions but even when they apply a return must be filed annually. Read more here.

Value Added Tax (VAT)

Sales and lettings of property are generally exempt from VAT, but where an option to tax has been made on commercial property, VAT is charged at the standard rate. The standard VAT rate is currently 20%, and for 2024/25 registration for VAT is required where taxable supplies (standard rated, reduced rated or zero-rated) exceed GBP 90,000.

The first sale of a freehold or the first grant of a long lease in new residential property by the person constructing (or converting from commercial) that property is zero-rated. Other sales or letting of residential property are exempt from VAT. Where a property disposal or letting is exempt, no VAT is chargeable on the rent or disposal consideration, although VAT suffered on associated costs cannot be reclaimed. 

The freehold sale of new commercial property (fewer than three years old) is subject to VAT at the standard rate. Other sales or lettings of commercial property are exempt from VAT, subject to the option to tax. 

When making an option to tax, consideration needs to be given both to the impact on the seller/landlord’s VAT recovery position and to the buyer/tenant’s VAT position. Certain disposals of commercial Investment property can qualify as business transfers (TOGC) and will be free of VAT.

Council Tax

UK residential property (subject to some exemptions) is liable to a local property tax based on the value of the property – there are up to 8 bands (9 in the Wales) with the local authority able to set the annual charge for each band to cover the cost of local services. On commercial property, the Local Authority charges Business Rates to be paid by the occupier although there are some exemptions for certain businesses and organisations. 

Inheritance Tax (IHT)

In the 2024 Spring Budget the Government set out proposals to abolish the current tax treatment for UK resident non-domiciled individuals (non-doms) from 6 April 2025. After which a new residence only based regime will apply. Read more about the changes here.

As part of the changes to the tax treatment for UK resident non-domiciled individuals, there will also be significant changes made to the operation of UK Inheritance Tax, the details of which are unknown at this time.

Currently, on death, non-UK domiciled individuals are liable to IHT at a rate of 40% on the value of all their UK sited assets, for example a UK home. However, transfers between spouses/civil partners – including on death - may be exempt from IHT, depending on their domicile status. 

Where assets are chargeable to tax the first of £325,000 of the total value is effectively ignored (it is called the nil-rate band (NRB)). An additional nil-rate band is available when a residence is passed on death to a direct descendant, or when a person downsizes or ceases to own a home and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants. The additional nil-rate band is £175,000. There is a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2,000,000, at a withdrawal rate of £1 for every £2 over this threshold. 

Surviving spouses and civil partners can claim the proportion of the NRB and additional NRB that was not utilised by the deceased spouse or civil partner. 

Companies are not subject to IHT. Therefore, many non-UK investors have in the past used offshore holding companies to avoid IHT. However, since April 2017, all UK residential property held directly or indirectly by foreign domiciled persons is subject to IHT. This applies even when the property is owned through an indirect structure, such as an offshore company or partnership.

Residential and commercial property disposals

Gains on the disposal of any UK residential or commercial property held by a non-resident ‘person’ are generally taxable. Special rules may apply to some collective investment schemes and certain institutional investors. Some properties held prior to April 2019 may benefit from a rebasing for tax purposes.

Gains of non-resident individuals and certain trustees are subject to capital gains tax (CGT) at the higher rates (up to 24% from 6 April 2024) for residential property or the main rates (up to 20%) for commercial property. A disposal of property must be reported, and tax paid on account, within 60 days of completion. There are limited exceptions, for example 'no gain/no loss' transfers between spouses. It is not possible to delay paying CGT until filing a self-assessment tax return. 

Gains made by non-resident companies are subject to corporation tax (25%). The company will have to register with HMRC within three months of making their first disposal, if not already registered to pay corporation tax in respect of income from rents. Payment of tax is usually due nine months and one day after the end of the accounting period. Large or very profitable companies pay tax sooner under the quarterly instalment payment (QIP) regime. If a company disposes of its only property this could result in a 1-day accounting period, which would also accelerate the payment date. Losses may not be reportable, but it is sensible to so that they can be claimed against future gains on similar disposals. 

Dealing in or developing UK land 

Profits from disposals of land derived from a trade of dealing in or developing UK land, are chargeable to UK corporation tax or income tax. This is irrespective of the residence status of the landowner and regardless of whether or not the activity is conducted through a permanent establishment. 

The legislation is detailed, but amounts are treated as profits of a trade of dealing in or developing UK land, where one or more of the following conditions are met: 

• The main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land;
• The main purpose, or one of the main purposes, of acquiring any property deriving its value from the land (e.g. shares in a property development company) was to realise a profit or gain from its disposal;
• The land is held as trading stock; or
• (Where the land has been developed) the main purpose or one of the main purposes of developing the land was to realise a profit or gain from disposing of the land. 

These rules can apply to assets deriving their value from land such as shares, in which case any gain on the disposal of the shares would be taxable as an income receipt instead of as a capital receipt. In the case of non-residents, this would mean that the tax base of the shares would be the market value on 6 April 2016 (or the date of acquisition if later), rather than the revaluation dates considered above in respect of assets held for the purposes of investment.

Disposals of interests in ‘property rich companies’ 

A disposal by a non-resident of an interest in an entity, such as a company or certain trusts, which is ‘UK property rich’ and which is either a collective investment vehicle or narrowly controlled is within the scope of either CGT (for individuals) or corporation tax (for companies).

An entity is ‘UK property rich’ if, at the time of the disposal, 75% or more of the value of the asset disposed of derives directly or indirectly from UK land (whether commercial or residential). This test is based on the gross asset value of the entity, looking at the market value of its assets at the time of the disposal without any deduction for liabilities such as loan finance.

Investors in property funds that are collective investment vehicles

A separate regime operates for UK property rich collective investment vehicles, which includes certain types of property trusts, UK REITs and offshore companies similar to REITs. The default position is that all disposals by non-residents of investments in such vehicles are taxable.

Various elections might, however, be possible in some cases at the fund level for the fund, among other things, to be treated as transparent for tax purposes, in which case it might be the case that on a disposal of an investment in the fund the investors themselves could be deemed to be realising a gain on their share of the underlying assets of the fund. These rules are very complex and subject to numerous conditions. Where eligible, the choice of elections will depend on a number of factors including the tax profile of the investors (all of the investors in the fund, including UK individuals and companies, may be affected so specialist advice from BDO should be sought).