What are the tax implications for a foreigner buying UK property?

The United Kingdom continues to be a popular destination for those looking to purchase residential property. With its cultural depth and lot of business opportunities, as well as its convenient time zone and excellent educational options, many people seek properties as permanent residences, vacation or seasonal homes; others as places to stay while conducting business or as investment opportunities.

Purchasing property in the United Kingdom as a foreigner is simpler if you are a cash buyer who does not require a mortgage or additional borrowing. If you are a foreign national looking to purchase property in the United Kingdom, it is critical to have a thorough understanding of the property market and sufficient funds.

What are the tax implications for a foreigner buying or disposing of the UK property?

If you are a non-resident intending to purchase a property in the United Kingdom for the purpose of renting it out, the HMRC has clear tax regulations. Additionally, you may be required to pay tax if you sell property or land in the United Kingdom and make a capital gain. If you live overseas for six months or more every year, HMRC classifies you as a 'non-resident landlord,' even if you are a UK tax resident.

There are various tax requirements and restrictions that non-residents should be aware of when purchasing or disposing of property in the UK. These include the following:

1. Inheritance tax

   – Non-UK residents and non-UK domiciled persons are frequently exposed to UK inheritance tax as a result of their UK residential property ownership. You can take the help of a tax expert to take guidance on this matter.

   Even if you have no intention of becoming a resident in the UK, or if you purchase a residential property in the UK, you will be subject to inheritance tax. On death, 40% inheritance tax is levied on the value of all UK situated assets for the non-UK domiciled individual's (whether they are UK residents or not). In certain cases, an individual's debts may reduce the amount subject to inheritance tax. It is worth noting that property transferred between spouses is normally tax-free (subject to certain limitations when you pass the property to the surviving spouse, who is a non-UK domiciled individual).

   In the United Kingdom, you can limit your liability to inheritance tax by getting a mortgage on the property at the time of purchasing. Additionally, you may decide to seek life insurance to cover any inheritance tax liability associated with the property’s equity.

2. Stamp duty land tax

   – The recent increase in the SDLT has impacted all property acquisitions. Non-resident persons, businesses, and trustees will pay an additional 2% stamp duty land tax (SDLT) on residential property acquisitions from 1 April 2021. You may take exemptions if the entity is in a lettings business or a developer. From 1 October 2021, the following standard SDLT rates will apply to purchasers who are individuals:

   UK property current residential rates

   Property or lease premium or transfer value	SDLT rate
   Up to £125000	Zero
   The next £125,000 (the portion from £125,001 to £250,000)	2%
   The next £675,000 (the portion from £250,001 to £925,000)	5%
   The next £575,000 (the portion from £925,001 to £1.5 million)	10%
   The remaining amount (the portion above £1.5 million)	12%

3. Additional 3% SDLT rate

   – If the UK property purchased is an extra residential property already owned elsewhere in the world, a 3% surcharge is added to the normal rate of SDLT. This additional 3% surcharge is waived if you are replacing your primary residence on the same day.

   If you do not sell your prior primary residence on the same day you acquire your new UK property, you will be subject to an additional 3% SDLT charge, but in such a case, you have a tenure period of up to three years to sell your previous residence and reclaim the additional tax. Once the property is sold, you may reclaim the additional 3% SDLT payment. For the purposes of the additional 3% rate, the purchaser and their spouse or civil partner are classified as one person. Therefore, if your spouse has a residential property elsewhere in the world and purchasing a new residential property in the United Kingdom, you will be classified as a single entity, and the additional 3% SDLT tax will still apply.

4. 2% non-UK resident charge

   – Since 1 April 2021, non-UK residents purchasing residential property in England and Northern Ireland have been subject to an additional 2% SDLT surcharge. This effectively means that if you are purchasing a house in the UK that will not be your primary residence (i.e. you are already the owner of another property), you need to pay the 2% non-UK resident surcharge on top of the 3% SDLT fee on additional residences.

5. 15% flat SDLT rate on corporate ownership

   – If you purchase a property from a company and the property’s value exceeds £500,000, a 15% SDLT flat rate will be applicable. You may be eligible for limited exemptions from the flat 15% SDLT rate, such as when the acquisition is made for letting purpose as part of a rental business or property trading or development business.

6. Purchase of shares in a property holding company

   – SDLT is not payable if you purchase shares in a property holding company. However, there are some possible drawbacks of investing in a property holding company that you should discuss with your tax and legal counsel, not the least of which is ATED (Annual Tax on Enveloped Dwellings) Additionally, as of 6 April 2017, acquiring residential property in the United Kingdom through a company does not provide any protection from the inheritance tax.

7. ATED

   – ATED is a yearly tax payable by companies that own residential property in the United Kingdom having a value of more than £500,000.Current ATED charges are –

   Property value	Annual charge
   More than £500,000 - £1 million	£3,700
   More than £1 million - £2 million	£7,500
   More than £2 million up to £5 million	£25,300
   More than £5 million up to £10 million	£59,100
   More than £10 million up to £20 million	£118,600
   More than £20 million	£237,400

   ATED provides a number of exemptions, the most prevalent of which are –

   1. When the property is rented to a third party on a commercial basis (so long as the occupant is not related to you, the owner), and
   2. Where the property is used as part of the business of a property trading or developing.

8. Capital gains tax

   – CGT is due at a rate of 28% on any profits realised on the disposal of residential property by all UK residents and (as of 6 April 2015) non-UK residents. Gains on the disposal of your only or main residence by gift or sale are exempt from CGT under the Principal Private Residence Relief (PPR). Individuals are eligible for this benefit, but companies are not. If you are a non-UK tax resident, you may have difficulty claiming PPR because there are some conditions you need to fulfil in order to claim PPR –
   1. You must have spent at least 90 midnights in the UK property in a relevant tax year, or
   2. You must have spent at least 90 days in any other UK property that you own.

   From 27 October 2021, residents of the UK and non-residents of the UK who dispose of residential property in the UK must report and pay any CGT due within 60 days of the transaction's completion.

9. Income tax

   – If a property is purchased for the purpose of renting it out, a 20% withholding tax is charged from the landlord's gross annual rental revenue from the property. When the letting agent collects money from the tenant, this process is complete. To avoid paying this additional tax, the individual must register with HMRC under the Non-UK Resident Landlord Scheme and receive the gross rental revenue once registered. They would be required to file a self-assessment tax return each year and pay income tax on the net rental profit at a rate of 20%.

If you have questions regarding the tax implications for a foreigner buying UK property, please speak to one of our dns experts right now on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

Disclaimer :- "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.