Jersey residents investing in UK property

Monday 03 August 2015

By Phillip Dearden, Director - Tax, Equiom Solutions

Introduction

Until recently, the tax position of Jersey residents looking to invest in UK property, was relatively benign. If an individual acquired the property, any rental income earned would be taxed at UK income tax rates up to 45% and there would be no Capital Gains Tax (CGT) on sale. Were the owner to pass away whilst owning the property, however, there would immediately be an Inheritance Tax (IHT) exposure, in respect of the property. 

A popular alternative was to own UK investment properties via a non-UK resident company. This would mean that tax on rent was capped at 20% and there would be no exposure to estate taxes or tax on disposal.

Recent changes

The above remains the case for investments in commercial property, but there have been a number of changes with respect to residential property.

From April 2015, all disposals of UK residential property by non-residents have been subject to Capital Gains Tax. This change won’t have affected anyone to a great extent as yet, since all acquisition costs can be re-based to market value, as at 5 April 2015. The rate of tax will be the normal UK CGT Rates of 18% and 28%.

In addition to the above charge, which applies to all non-resident owners of UK residential property, a separate charge had previously been implemented for disposals of “high value” residential property held by non-resident companies. This charge initially applied to properties worth more than £2m from 6 April 2013, but that threshold has been steadily reduced to properties valued at more than £1m from 1 April 2015, falling to a lower level still of more than £500,000 from 1 April 2016. The charge is levied at 28% and is based on increases in value over the estimated value at 6 April in the year the appropriate threshold became relevant, or the actual cost, if acquired after that date.

In order that HMRC can collect tax with respect to these new charges, there is a new reporting regime. A non-resident who sells UK residential property is now required to file a return regarding the disposal, within 30 days of conveyance. This reporting requirement applies whether there is any tax to pay or not.

Residential properties owned by companies are also now exposed to an annual charge where they exceed the thresholds described above. This tax is known as the Annual Tax on Enveloped Dwellings (ATED), “enveloped” being HMRC’s phrase for properties in corporate ownership. In the current year the ATED charges range from £7,000 (for properties worth between £1m and £2m) to £218,200 (for properties valued at over £20m). This charge will increase with inflation.

In addition to annual charges and charges on disposal, there is also a 15% Stamp Duty Land Tax (SDLT) charge, where residential property is acquired by a company, unless an exemption applies.

Seeing residential property as a money-spinner, UK Treasury have now proposed that all such property, however owned, will be brought within the scope of UK IHT. For Jersey residents, the main implication of this amendment is that owning UK property via a Jersey company will no longer constitute an IHT shelter. Indeed, on the passing away of a Jersey resident and domiciled person owning shares in a company which owns UK residential property, there may now be an IHT exposure, at up to 40%. This change is currently scheduled to commence from April 2017.

Choices

The proposals referred to above, mean that a Jersey resident investing in UK residential property, has to choose between personal or corporate ownership. There will be a tax on disposal in either case so, until recently, the choice had been between personal ownership (with a potential IHT exposure) or corporate ownership (with a possible exposure to annual charges). Following the Summer Budget, there is now likely to be an IHT exposure in either case. A company will provide protection from higher rates of income tax, although it may come with a one-off SDLT cost and also an annual charge, where the property is worth more than £1m (reducing to more than £500k from 6/4/2016).

In short, Jersey residents investing in UK residential property, now need to carefully consider the tax consequences of that investment before proceeding.