With gains from the sale of UK commercial property now within the charge to UK CGT it is worth reflecting on the tax issues associated with buying UK property. An Irish individual (Irish domiciled and Irish tax resident) acquiring a UK property will need to consider the following taxes:
• Stamp duty land tax
• Income tax/corporation tax
• Annual tax on enveloped dwellings
• Capital gains tax
• Inheritance tax
Stamp Duty Land Tax
Stamp duty land tax (SDLT) is payable on the acquisition of property in the UK, apart from Scotland and Wales where instead Land and Buildings Transaction Tax (Scotland) and Land Transaction Tax (Wales) are payable.
SDLT is chargeable at progressive rates which vary depending on whether a residential or non-residential property is being acquired. For a residential property the rate starts at 3% and reaches 15% for a property valued at in excess of £1.5m. There is no SDLT on commercial properties valued at less than £150,000. The top rate of SDLT for a commercial property is 5% and is payable on properties valued at in excess of £250,000.
Land and Buildings Transaction Tax (Scotland) and Land Transaction Tax (Wales) are also charged at progressive rates and vary depending on whether a residential or non-residential property is being acquired.
Income Tax/Corporation Tax
Personal rates of tax
An Irish individual will be liable to UK income tax on income from a property located in the UK. An Irish individual is entitled to deduct UK personal allowances, £12,500 for 2019/20, in calculating taxable income provided taxable income does not exceed £100,000. Reduced personal allowances are available where taxable income is between £100,000 and £125,000. The standard rate of UK tax is 20% which applies to taxable income up to £37,500. Taxable income between £37,000 and £150,000 is liable to tax at 40%. Income in excess of £150,000 is taxed at 45%. This means that for 2019/20 an individual with net rental income of £100,000 will be liable to UK income tax of £27,500 (27.5%) and an individual with net rental income of £200,000 will be liable to UK income tax of £75,000 (37.5%).
Non-UK resident companies currently pay income tax capped at 20% on UK rental profits but are not entitled to personal allowances. UK resident companies pay corporation tax at 19% on rental profits. With effect from 6 April 2020 non-UK resident companies will also pay corporation tax on UK rental profits.
Non-resident landlord scheme
A tenant who pays rent to a non-UK resident landlord is required to withhold tax at 20% from the rent paid unless the landlord registers as a non-resident landlord with HMRC. Once a landlord registers as a non-resident landlord with HMRC, HMRC will notify the tenant that rent may be paid without deduction of tax.
Calculation of taxable rental income
The calculation of taxable rental profits for UK tax purposes is similar to the calculation for Irish tax purposes; expenses incurred wholly and exclusively for the purpose of renting out the property are deductible from rental income received to arrive at rental profits liable to tax. The deduction of finance costs relating to residential properties is however being phased out. For 2019/20 only 25% of finance costs are deductible. From 2020/21 onwards no finance costs are deductible. The restriction on finance costs only apply to individuals. Finance costs incurred by companies are fully deductible.
As a general rule expenditure on capital items are not normally deductible in calculating taxable income. In Ireland relief for expenditure on plant and equipment is generally given by way of annual wear and tear allowances over 8 years. In Ireland there is no relief for expenditure on the acquisition or construction of a building other than an industrial building. In the UK relief for capital expenditure is given differently depending on whether the property is residential or commercial. For commercial property relief is given for expenditure on plant and equipment by way of annual wear and tear allowances (generally 18% on a reducing balance basis). 2% annual allowances are available for expenditure on the construction of a commercial property. For residential properties (other than furnished holiday lettings which are treated as commercial properties) a deduction can be claimed against rental income for the cost of replacing domestic items such as furniture and household appliances when the expenditure is incurred. However there is no tax relief for the initial cost of purchasing such items.
Double taxation relief
An Irish person who pays UK tax on UK rental income will be entitled to a credit for UK tax paid against any Irish tax payable on the same rental income
Annual Tax on Enveloped Dwellings
Annual tax on enveloped dwellings (ATED) is an annual tax payable by companies (and collective investment schemes) that own UK residential properties valued at in excess of £500,000. The tax is payable when the property is only partly owned by a company, for example the tax is payable by a partnership if one of the partners is a company. The tax payable varies depending on the value of the property. For a property valued at between £500,000 and £1m, the annual charge is £3,650. The maximum annual charge is £232,350 and is payable on properties valued at more than £20m.
Capital Gains Tax
Non-UK resident individuals are liable to UK non-resident capital gains tax (NRCGT) on disposals of residential and commercial property and on “indirect” disposals of UK land. An “indirect” disposal of land occurs where a non-UK resident disposes of shares in a company that derives 75% or more of its gross asset value from UK land (including buildings) and the person making the disposal owns at least 25% of the company.
Prior to 6 April 2015 a non-UK resident individual was not liable to CGT in the UK on the disposal of UK property held for investment purposes. With effect from 6 April 2015 disposals of residential investment properties by individuals (and closely held companies, trustees, personal representatives and funds) were brought within the charge to tax. With effect from 6 April 2019 disposals of non-residential investment properties and indirect disposals of property were brought within the charge to tax. In addition the charge was extended to non-resident diversely held companies. Only gains arising after the property was brought within the charge to tax are liable to NRCGT. This means that in calculating the gain arising on the disposal of a residential property it is assumed to have been acquired at market value on 6 April 2015 and for a commercial property and indirect disposals they are assumed to have been acquired on 6 April 2019 (1 April 2019 for companies).
• A non-UK resident individually purchased a commercial property on 1 January 2010 for £300,000
• Under the rebasing rules, the property will be revalued on 6 April 2019 at £400,000
• The individual then sells the property on 31 December 2024 for £500,000
• Only the £100,000 uplift in value since 6 April 2019 will be liable to UK CGT and not the total uplift value of £200,000.
• Remember for Irish CGT purposes in calculating any gain you convert to Euro at the rate of exchange that applied at the date of purchase and at the date of sale.
The rate of NRCGT payable depends on the amount of the individual’s income liable to income tax and on whether the property being sold is residential or non-residential. Individuals who pay income tax at 20% will be liable to NRCGT at 18% on residential property and 10% on non-residential property. Individuals who pay tax at in excess of 20% are liable to NRCGT at 28% on residential property and 20% on non-residential property.
Companies pay corporation tax at 20% on all NRCGT gains.
A non-resident is required to report the disposal of an asset to HMRC within 30 days from the date of the conveyance. Any tax due on the disposal must also be paid at this time unless the vendor is registered for and pays tax under the self-assessment system.
An Irish person who pays UK tax on the disposal of an asset will be entitled to a credit for UK tax paid against any Irish tax payable on the same gain.
Individuals who are not domiciled in the UK are only within the charge to UK inheritance tax on UK assets. Broadly an individual is regarded as domiciled in the country which they regard as their permanent home. UK property held personally by an Irish individual is within the charge to UK inheritance tax on the death of the owner. No UK inheritance tax applies where the property is inherited by a spouse of the same domicile. Where the property is inherited by someone other than a spouse the value of the property in excess of £325,000 is liable to inheritance tax at 40%.
If UK property is held by a by an Irish person through a non-UK company shares in the company are not within the charge to UK inheritance tax on the death of the individual.
An individual is entitled to a credit for UK inheritance tax against Irish capital acquisitions tax payable on the inheritance of UK property.
The above is intended as a general guide. No action should be taken on the basis of the above without obtaining professional taxation advice.
If you have any queries please do not hesitate to contact Purcell McQuillan Tax Partners Ltd on 01 668 2700.