The UK Real Estate Tax System Explained by Alan Kennedy | Trident Tax | ATED

Learn everything you need to know about the UK Real Estate Tax System, including inheritance tax and ATED. Also get some tips and tricks and may save you a considerable amount of money, while also learning the basic deadlines and tax percentages.

 Alan founded Trident tax, just over 12 years ago. The team form a specialist tax boutique that deals with many high net worth individuals and their families. They advise many overseas investors, naturally, property investment and development is a big part of their work.

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London Property Home of Super Prime where you can find informative, educational and entertaining content covering all aspects of property. 

Hi, I'm your host. 

Farnaz Fazaipour and today we're in conversation with Alan Kennedy, who's an expert tax advisor and the MD of Trident tax. 

Hi Alan, nice to have you with us. 

Thank you. 

Uhm, so why don't we start by you telling us about yourself and your career to date? 

And before we launch into the questions we have for you. 

Yes, of course. I founded Trident tax, just about 12 years ago in 2009. We're a specialist tax boutique and we deal with a lot of high net worth individuals and their families. We do a lot for overseas investors. And obviously, property investment and development is a big part of what we do. We're a team of ex-KPMG specialists and we're 8 tax advisors in the team and prior to founding the business, I spent about 8 1/2 years at KPMG and prior to that for my sins, I was a tax inspector. 

Yes, that's what we like most about you, so you know exactly where they're looking. 

Uh, yeah, we still do a lot of work that involves dealing with HMRC disputes. So we when we have a quite a lot of experience within the team, a number of people with similar backgrounds to me who've worked on both sides of the fence. 

Fantastic, OK, so for the purposes of this podcast, let's start with a general introduction into the UK tax system for real estate. 

OK, so it's kind of subdivided into buy to let and then property development and then within those subsets. And we're thinking about the tax implications for overseas parties. So, if we start with a property development 1st and it used to be the case that there was an ability for overseas companies or perhaps even overseas individuals to do a property development project in the UK but hopefully escape UK taxes. Uhm, the scope for that has been severely reduced because of some tax legislation changes that were made a few years ago. Uhm where basically they will say that a building site is a place of business. It's a branch in the UK of the overseas company. And the overseas company will be forced to pay UK corporation tax on its development profits. The good news, however, is that we do have the lowest rate of corporation tax in probably the G20 at the moment, and even with an increase in the corporate tax rate in a couple of years, I believe we will still have one of the lowest rates in the G7. So that's property development in terms of the profits for buy to let investors the issues really are paying tax on the rental profits and capital gains tax on the disposal profits when you do get rid of an investment property. Uhm, nonresident capital gains tax started in 2015 for residential property and it started in 2019 from non-residential property and we have different rates for individuals and companies. So, for individuals, the nonresident CGT rate is 28% and for companies, it's the corporate tax rate which is currently 19%. And beyond that, then we have tax on rental profits, and if you're a company, you pay corporate tax at the rate of 19% on your rental profits. If you're an individual, if you're making higher profits, you might pay up to 40% or even 45. 

if your profits are over 150,000, but very broadly speaking, if your profits are below around about £35,000, you only pay tax at 20%. 

Now there are obviously other taxes, like a purchase tax, and there are some slightly more esoteric taxes like the ATED, which I'm sure we might. 

We might come to a bit later in the discussion. 

OK. 

And what UK taxes should an overseas buyer consider when purchasing your UK realistic? 

Well, they do need to think, particularly if they're buying residential property. 

One of the taxes that maybe is a bit of a surprise that they do need to think about is inheritance tax, so it used to be that non UK investors didn't have to worry about inheritance tax at all. 

If they die, nothing happened. 

When they did the under UK property. 

That's still the case if you're investing in commercial property or undeveloped land. 

But if you're investing in residential property, then you do need to think about a potential exposure to inheritance tax, and that really drives the ownership structure that you want to adopt. 

Uhm, also, if you are a buy to let investor and you're looking at residential property and you want to use it privately previously you might thought about a company, but we have this ATED tax, which means that if you have residential property worth at least half a million pounds, and you're. 

Using it privately, you're not letting it out. 

Then you will get an annual tax based on the value of the property, which is a disincentive clearly to using a company. 

On the other hand, if you're not going to keep the property for too long, and you think you might make a large gain, you might want to suffer that ATED tax in a company and expect to pay a lower rate. 

Corporate of tax on the gain when the property is sold by. 

The company so. 

What it illustrates, I think, is that you have to look. 

At each client, very much on a case by case basis, and they need to understand in the context of their family and the business objectives as well what the best ownership structure is going to be. 

Right and SDLT also works differently for overseas buyers, right? 

It does come if you're not a resident taxpayer in the UK and you will pay 2% additional SDLT on the whole of the purchase price. 

Also, and this applies to anyone, not just nonresidents. If you're a company or a trust, you'll pay an additional 3% on the whole of the purchase price. So if here, for example, a non resident trust. 

You're going to pay an extra 3% on the purchase price, and an extra 2% just for being non resident. 

So you'll pay a total of 5% more on residential property, so there are some things to be aware of. Also, and this is common for buyers who are resident in the UK. 

If you're buying residential property and you already own an interest in residential property anywhere in the world, not necessarily the UK, then you're also liable for this additional 3% on the whole of the purchase price. 

Right, and what type of ownership would should they consider and how will it make a difference to taxes if they're buying from overseas? 

OK, so in in order to avoid this additional 3%, UM, some people might want to give their children money to buy the property, so they might make a gift, or perhaps a loan to their children. 

The children maybe don't own any interests in residential property anywhere in the world, and if they can make the purchase in that way, then they may save 3% of the purchase price. Just as an example. 

So those kind of ideas can be quite useful for inheritance tax. 

Again, it may be useful for the children to own the property, so the risk of someone passing away has moved down to the next generation. 

Right, OK? 

And so how does tax work for corporate buyers then? 

So, for corporates as we've said, UM. 

Even though the corporate entity does not own any residential property at all, we'll always get the additional 3%. 

OK, so that's to begin with. 

Now if the corporate buyer is buying residential property and it's worth more than half a million if they're going to let the property out. 

To on the market and anyone can come along and rent it. 

That's fine, they wouldn't be liable for this additional 8 head charge, but they still have a filing requirement every year to claim an exemption from that ATED OK. 

The rental profits that they earn. 

They'll have deductions against those rental profits for the running costs of the property, and normally for the interest costs if they've borrowed to acquire the property, and that will all help to reduce the rental profit on which they pay tax. 

And currently they'll pay tax at 19% on that. 

So even though they're a non-UK company, they'll still have to file a UK corporate tax return and pay any tax that's due. 

If they're lossmaking, they'll file a return and claim the losses. 

When it comes to a sale of a property by a company, again, even if they've not been letting the property, and therefore they've not been filing any corporate tax returns when it comes to the sale of the property, they will have to file a corporate tax return at that point. 

And if they've made a profit, they'll pay corporation tax on the profit, but even if they've made a loss, they still have to file the tax return and the big point here. 

Is that they will have to file the tax return within nine months of the end of the accounting year. 

And if they've made a larger profit, they'll actually have to file it within three months, and so you do need to work out very quickly what your profit is. 

And there's certain levels of profit that will mean that. 

You have to file a bit in earlier. 

Right and then for individuals and families. 

So for individuals and families, and this is not just for overseas buyers, this is now for. 

Anyone on residential property? 

And for any real estate you have to file a capital gains tax return within 30 days of completing the transaction, so that's not long at all, and particularly if you've never had any dealings with the UK tax system, you have to move very quickly. 

So really you have to be organized. 

In advance the transaction be talking to a tax advisor and be ready to make that filing because if you don't make the filing quickly, there will be some late filing penalties. 

Right and what about trusts? 

How do they differ from the other two? 

And trusts are under the same regime as individuals, so they pay capital gains tax rather than corporation tax. So if the trust owns the property directly rather than a company underneath the trust, the trust will be liable for tax at 28%. If it's a company owned by the trust, it will be the company that has the. 

Filing requirement and the tax will be payable at 19%. 

Right, and if a property is rented out then then there's different tax regimes that that you pay every year, right? 

Yeah, so if a trust owns a property directly, it will pay income tax. 

And if a company, either a standalone company or a company owned by a trust, rents the property out, it will pay corporation tax. 

Right and what it was deductible from a rental income. 

Well, typically any repair costs. 

Any professional costs. 

Any interest costs that the business might have, so the normal running costs of a business are deductible. 

The things that are not deductible are any alterations. 

Or improvements or extensions to the property. 

Because they're regarded as capital expenditure, so they're not deducted against your rental profits. 

But they are a deduction later against the capital gain when you sell the property. 

And I've always understood that a deductible expense, even if it is a capital expenditure, if it's done at a request of a tenant, so they wouldn't rent it unless you did. 

That is that does that fall under deductible expenses, or still not. 

So you're saying that the profit is sorry the UM, the tenant insists on some modification to the property before they're prepared to rent it? 

OK. 

Yeah, so you could argue that what you're doing is incurring a cost for the purposes of earning your rental income and say this is wholly for the purpose of earning the profit. 

So you could, I think, justify an argument on that basis, whether. 

The tax authority would agree with that I think would be a question of looking at the facts and circumstances. 

OK, and what about tax allowances? 

Are there any tax allowances? 

Yeah, so on the on the rental side of things. 

There are special tax allowances so. 

We have something called capital allowances, so capital allowances basically give you a tax write down for some of the capital costs. 

So if you were for example installing a lift in a building or putting in a new electrical system or a. 

New cold water system. 

And then those kind of costs, although their capital expenditure, you get a tax write down over a period of time. 

So it's broadly designed to replace accounting depreciation, but the two things have their own special rates, so those are specific allowances. 

That can be given that help reduce the rental profits. 

There are also some special allowances relating to fixtures and fittings, so things like I don't know washing machines etc. 

There are other forms of equipment, air conditioning, electrical systems. 

These all qualify for their own special kinds of allowances, and if you have green energy systems, for example, they can qualify for enhanced allowances at faster rate. 

OK, and how does capital gains actually affect a person who's invested in property? 

So if you are someone who's already invested in UK real estate and you're not resident in the UK, then when you bought the property you may not have ever had any exposure to UK capital gains tax. 

But you might now. 

And so if you bought residential, let's say you bought the residential property 10 years ago for £1,000,000 and the property is now worth £2 million and you sell in tomorrow, you might think I will pay capital gains tax on my profit of 1,000,000. But actually because they only introduced. 

Non resident CGT in April 2015. 

Everyone gets an uplift in their costs to whatever the value of the property was at April 2015. 

So let's say it was by April 15. It's worth 1.5 million. Then we're only going to pay capital gains tax on a profit of 500,000, even though we've made an economic. 

Profit of £1 million. 

If for some reason your property has decreased in value by April 2015, you can make an election to use the original cost as your capital gains tax base cost. 

If that's higher than the April 2015 valuation, so you shouldn't lose out in in that system. 

For commercial property and land it's different. The capital gains tax only arrived in April 2019. So again, if you have commercial property and you bought it before April 2019, you will have your base cost. 

Re or re based or uplifted to April 2019, so you'll only pay on any increase in value from April 2019 onwards. 

Right and then the other thing to consider when you're buying a property in a non natural person name. 

As they say, is ATED. 

Can you talk us through that? 

Yeah, so ATED. 

Is something that was introduced in 2013 so up to that time it was possible for non UK investors to own residential property through an overseas company and not have any exposure to inheritance tax and that's why people held their London. 

Properties, in particular in that way. 

HMRC saw this as an opportunity to extract money from people on the basis that they could get some money from them, but on balance people would still want to hold onto the offshore company because they were protecting themselves from inheritance tax. 

So although it might cost some money, they were still saving overall in the long term on inheritance tax, so we have a banded system. 

And so we have properties that are in the range of 500,000 to a million. We have a 1,000,000 to 2,000,000 range. 

We have a 2,000,000 to 5,000,000 range 5,000,000 to 10 million at 10 to 20 million and finally the final band. Anything over 20 million. So this is where we have a company that has an interest. 

In a residential property, and it's not being let out to an unconnected party or it's not being developed as part of a property development project. 

In those circumstances, there is the ATED tax liable, and at the very low end it can start as low as about three and a half 1000 pounds. 

For a 500,000 property and at the very high end for a property that's 20 million. Plus we're looking at £230,000 a year now. 

For a number of those rates I might add have gone up significantly in the last eight years. 

But that had a particular effect on people because in 2017 they changed the rules on inheritance tax, and said if you own an offshore company and if that offshore company owns UK residential property, when you die, there's still an inheritance tax bill even though you don't. 

On the property you own the offshore company. 

And what that caused people to do was to realize that paying the ATED charge every year was no longer buying them protection from inheritance tax. 

So what we've been involved with since 2017 is people taking these UK properties out of the companies. 

To save the ATED, knowing that they'll still have exactly the same exposure to inheritance tax, and we call that de-enveloping. 

Right? 

And we have to be careful how we do that, because in the act of de-enveloping, the company disposes of the property, and although no one is paying for the property, it's still treated as a capital gains tax event. So if the properties increased in value since 2015, we might have some. 

Capital gains tax to pay. 

So we have to look carefully. 

Yeah, how much CGT there is to pay versus how much ATED we're going to save, and if we're not going to keep the property long enough to save more than ATED when we pay in capital gains tax, then we might have to keep it where it is. 

But more often than not. 

The best answer is to de-envelope. 

Right and then, what about if you want to develop a UK property, what taxes do you need to consider in those circumstances? 

OK, so normally uhm. 

Before the ring fencing of risk. 

Commercial risk. 

This would be done through a limited company. 

Uhm, often it would be done through an overseas limited company and as I said earlier, although that company might have its directors outside the UK because it will be treated as conducting. 

A trade in the UK. 

It will pay UK corporation tax on its profits. 

It can have some expenses deductions against those profits, but there are special anti-fragmentation rules to stop companies and depressing the profits through related companies so that they become artificially low so that that. 

Area is called the transactions in land tax, and that that's quite a specialised area. 

That we have to pay particular attention to, but the bottom line is, as I said, we have a fairly low rate of corporate tax, and once the company has made the profits, even if they choose to use a UK company 'cause it will pay exactly the same amount of corporate tax for an overseas investor. 

At the end of the projects, they've paid some tax corporate tax and they've got the profit left in the company. 

Whether they liquidate that company to extract the profit or just take a dividend, there is no UK withholding tax on their extraction of that. 

Profit so more and more we see people saying I will just use a UK resident company to conduct my property development project. 

It will pay the same corporate tax as an overseas company and as the shareholder when I take my money out at the end, I don't pay anymore. 

Tax because it's a UK company. 

Right, so it's all. 

It's all very sensitive, isn't it? 

To get to get the balance right? 

And what about the filing requirements? 

Yes, so I've said we've got an annual filing requirement. 

If the ATED is something that either has to be paid or an exemption has to be claimed, then we have to do that every April. 

If we have rental profits, then we'll have a uh, once yearly filing for companies and that will be nine months after the end of the companies accounting year. 

Uhm, although if  we haven't picked in accounting year, the tax authority will automatically assume that the year end is the 5th of April, which is the. 

End of our tax year. If you're an individual or a trust that's renting property out, again, you'll have an annual filing requirement, and the filing will be due on the 31st of January every. 

Year and then we have these ad hoc filing requirements for capital gains if we're selling. 

OK, so it's wise to speak to you before starting down this route. 

If you're an overseas investor. 

Yeah, absolutely, because you know people have different needs and different objectives. 

Some people are younger and are not concerned about inheritance tax. 

Other people are concerned about inheritance tax. 

And the correct way to structure ownership will depend on whether you want to rent a property out, whether you want to use it privately, how long you want to keep it, and that will determine what the best method of ownership is, and it also might determine within your family group. 

Who should own the property or who should own the company towards the property? 

Right, I mean this is going to be a whole other conversation that we probably can have it at another stage, but institutional type investors. 

Do have some reliefs and are encouraged a bit more than us. 

Normal people right to do larger scale developments. 

And is there such a thing? 

'Cause I know there's some companies going around saying that there's SDLT reliefs that could be sought, and it's kind of a very grey area with services popping up and saying, yeah, we can. 

Save you lots of stamp duty because you know your land is mixed use or this and that. So if you're an institutional investor looking to come to the UK, let's say to build to rent 300 units, are there things that you could be looking at that are beneficial compared to? 

Yeah, definitely. 

So we have multiple dwellings relief for stamp duty land tax. 

So if you're purchasing six or more properties in a single transaction, that can reduce the rates from their residential rates to the non residential rates. 

Which can really make a massive difference and bring your SDLT rate down to about 5% or less. 

If you are combining a purchase of residential property with something that's non residential and it's a mixed use purchase again it can be possible to acquire everything at the non residential rate, but if you do things in an artificial. 

Way to try and reduce the rate. 

There is a special anti-avoidance rule within the stamp duty land tax regime that will prevent you doing that. 

So yeah, there. 

Historically there have been. 

Some schemes for stamp duty land tax reduction, some of which have gone to court and usually the tax authority wins. 

So I think the key message is there are statutory reliefs that you can take advantage of, but you have to take advantage of them in the way that was intended. 

By the UK Parliament and as long as you do that then you can make some serious savings. 

Right, OK? 

And you said earlier. 

So if you're buying in a non-natural person name then the ETA doesn't apply when you're in the development phase and so on obviously. 

Yeah you would, yes. 

So if you're a company that's buying to develop. 

But the property is already worth at least 500,000. The ATED won't be payable, but you must file something called a relief declaration. Return every April to claim that exemption. And I've seen case. 

This is in the past where people have failed to claim the exemption. They claim it late and although it's agreed that no ATED is payable, what they do end up with is several £1000 worth of late filing penalties, which is really unfortunate. 

That is unfortunate. 

You could have had it, but you can't have it. 

Now you're going to be fined for asking for it. 

Yes, yes actually yes. 

This seems quite unfair. 

OK. 

Yeah, well as you can imagine. 

Sometimes there, sometimes we have a bit of an Alice in Wonderland tax system at times. 

Yeah, but. 

Yes, well, I think it's a very interesting way of structuring, and I think it's really important to get the right advice, which is why we're speaking to you and thank you very much for a very informative chat. 

As you can imagine, I can carry on going on talking to you for four hours more, but we'll leave that. 

For a separate conversation, so thank you very much, Alan for joining us. 

Thank you very much. 

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