Stamp Duty on residential property currently applies when you buy a UK property whether or not you live in the UK. The rates differ depending on the value of the property and must therefore be considered when budgeting for the cost of a new property. The current rates are:
|Up to £125,000||0%|
|Over £125,000 to £250,000||1%|
|Over £250,000 to £500,000||3%|
|Over £500,000 to £1 million||4%|
|Over £1 million to £2 million||5%|
|Over £2 million from 22 March 2012||7%|
|Over £500,000 (purchased by certain non natural persons (unless purchased for letting on a commercial basis)||15%|
If the property value is above a payment threshold, stamp duty is charged at the relevant rate on the whole amount paid.
Important Changes to Stamp Duty
If you are considering purchasing a property in Scotland, it's important to note that from April 2015, Stamp Duty will be replaced in Scotland by a new tax called the Land and Buildings Transaction Tax (LBTT). This will be calculated in a different way from Stamp Duty. It will still be based on various thresholds, but once the price of a property reaches these thresholds, only that part of the price which exceeds the threshold will be charged at the higher rate.
The Scottish Government announced the proposed rates and thresholds for LBTT earlier this month. See this article for further details.
Non-residents are taxed in the UK on all of their UK income sources which includes rental income. For individuals, the basic rate of tax is 20% and this increases to 45% depending on the overall level of UK income. The rate for companies is 20%.
UK residents and some non UK residents are entitled to an annual tax free personal allowance, (£10,000 in the current tax year).
Non Resident Landlord Scheme
If an overseas investor wishes to receive the rental gross of tax, they must make an application to HM Revenue & Customs ("HMRC"). The tax must then be accounted for by the landlord to HMRC. If the landlord does not secure HMRC's agreement to receive the rent gross, the tenant or the letting agent must withhold income tax at the basic rate which is currently 20%.
Overseas landlords are usually advised to apply to HMRC in advance of letting the property for consent to have their rent paid gross. This often helps manage cash flow and also ensures the landlord can make full use of any available allowances.
Capital Gains Tax (CGT) Changes
Currently, CGT is not payable in the UK by non resident individuals on profits made on the sale of a property.
However, from 6 April 2015, non resident individuals will be brought into the scope of UK CGT and taxed on profit on the sale or transfer of a UK residential property. The Government has still to introduce legislation and confirm the tax rate. For UK residents, there are currently two rates for CGT, linked to the level of income - 18% and 28%.
Where the property is owned by a non natural person (e.g. a company) and sold for more than £2m, CGT is currently due at a rate of 28%. This threshold is going to be reduced to £500,000. Where the property is let on a commercial basis, this does not currently apply.
Inheritance Tax (IHT)
An overseas individual may be liable to IHT on death in respect of property (and other assets) held in the UK. There can also be IHT implications if assets are gifted during lifetime.
There is a tax free allowance known as the "nil rate band" which is currently £325,000. Careful planning is always advised to ensure full use is made of any available exemptions to help minimise the IHT charge on death.
If you hold UK property, it's important to consider how title should be taken if this is held by more than one individual and whether you need to prepare a Will to cover your UK property which, if structured properly, may help you to save IHT in the long run.
At Morton Fraser we can assist overseas clients with all aspects of their purchase and their ongoing tax obligations. As well as advising on the Scottish property market and assisting with the legal conveyancing, we can also advise on the most appropriate structure to hold your investment and with your annual tax reporting. For further information please contact us on the details below.