Taxes on high value residential properties in the UK

Out-Law Guide | 06 Jan 2020 | 5:20 pm | 11 min. read

A number of tax charges can arise on the purchase of high value residential property. Tax charges that can arise if the property is purchased personally or by a non-natural person such as a company or trust.

Stamp duty land tax charges

Stamp Duty Land Tax (SDLT) applies when property is purchased in England or Northern Ireland. Different taxes apply when land is purchased in Scotland or Wales.

Different rates of SDLT apply depending on whether a residential property is purchased by a natural or a non-natural person, such as a company, and whether or not the property is a second home.  

Where someone purchases their only property or replaces their main residence, the rate of SDLT payable on a purchase of UK residential property is staggered up to a maximum rate of 12%.  Different rates apply to different consideration bands and only consideration falling in each band is taxed at that rate. 

If someone purchases a second home or investment property there is a 3% up-lift to the rate of SDLT due, which applies to all properties worth more than £40,000.

This table shows the current rates of SDLT for residential property:

Property Value

SDLT rate

Additional property SDLT rate

Up to £125,000

0%

3%

£125,001 - £250,000

2%

5%

£250,001 - £925,000

5%

8%

£925,001 - £1,500,000

10%

13%

£1,500,001 or more

12%

15%

For example, a property costing £1 million that is a person's first home will give rise to an SDLT charge of £43,750. UK tax authority HMRC has published land and property stamp duty tax calculator.

A non-natural person has to pay a higher rate of SDLT when it purchases UK residential property. It pays the additional property SDLT rate even if it only owns one property. However, a flat rate of 15% rate applies where the consideration exceeds £500,000 and the purchaser is a company, collective investment scheme or partnership with one or more members who are either a body corporate or a collective investment scheme. 

The purchase of the shares in a company owning a residential property will not give rise to an SDLT charge. Stamp duty at a rate of 0.5% of the purchase price will be payable on the purchase of the company's shares. Consequently, purchasing the shares in a company that owns a residential property can give rise to SDLT savings, when compared to purchasing the property directly.  For more information on stamp duty see Introduction to Stamp duty  and for details of SDLT on commercial transactions see Out-law guide to Stamp Duty Land Tax.

The government consulted in 2019 on introducing a 1% SDLT surcharge for non-residents buying UK residential property. In its December 2019 election manifesto, the Conservative Party pledged to introduce a 3% surcharge for non-UK resident individuals and companies buying residential property in England. 

Annual tax on enveloped dwellings

The annual tax on enveloped dwellings (ATED) is charged on certain high value UK residential properties owned by non-natural persons.  The amount of the ATED payable depends on the value of the property (calculated either according to its value on 1 April 2017, or its subsequent purchase price).

This table illustrates the different bands:

Property value

ATED charge from 1 April 2019

Less than £500,000

£0

£500,000 - £1m

£3,650

£1m - £2m

£7,400

£2m - £5m

£24,800

£5m - £10m

£57,900

£10m - £20m

£116,100

£20m+

£232,350

ATED is paid through the self-assessment system, using an ATED return form. Every year, an ATED return needs to be completed for every UK residential property that exceeds the relevant threshold and is owned by a non-natural person. 

The ATED return will be due and the tax payable on 30 April each year (or, if later, within 30 days of the property being acquired). The charge will be index-linked.

If a property is acquired part way through an ATED tax year (running from 1 April to 31 March) the amount of the charge will be adjusted to reflect the period of ownership. If a property, subject to the ATED is sold, a relief claim can be made in respect of the part of the charge which relates to the period after the sale.

There are reliefs so that genuine property development and rental companies are protected from the charge.

Capital Gains Tax (CGT)

Until 6 April 2019, non-resident capital gains tax (NRCGT) only applied to gains made by non-residents on the disposal of UK residential property. However, the regime has now been substantially expanded.

Natural persons

Since 6 April 2015, UK capital gains tax (CGT) has been payable on gains arising on disposals of UK residential property by non-UK resident individuals. 

Only the gain arising from 6 April 2015 is taxed. Generally the value of the property as at 6 April 2015 (or later acquisition) will be the effective base cost. Individuals may be able to benefit from principal private residence relief. The gain is taxed at either 18% or 28% depending on the total UK source income and gains in the year of disposal. 

From 6 April 2019 non-resident capital gains tax (NRCGT) also applies to commercial property and to indirect disposals of interests in property rich entities. Gains on non-residential property are taxed at the normal CGT rates of 10% or 20%.

Non-UK residents are now subject to NRCGT on gains made on the disposal of an entity (such as a company) which derives at least 75% of its gross asset value from UK land if the non-resident owns at least a 25% interest in the entity being disposed of.

There is an exemption for property-rich companies which are trading and specific provisions apply to partnerships and other transparent collective investment schemes. In calculating gains which were not taxable before 6 April 2019, the acquisition cost of the property will usually be treated as its value on 6 April 2019, or subsequent acquisition date.

From 6 April 2020 UK residents who are subject to CGT on a disposal of UK residential property are required to make a payment on account of CGT within 30 days of completion of the disposal. This brings the payment requirement for UK residents in line with that for non-residents under the NRCGT regime.

Non-natural persons

From 6 April 2013, UK and non-UK resident non-natural persons were subject to CGT at 28% in respect of gains accruing on the disposal of interests in high value UK residential property that was subject to the ATED. This charge was abolished from 6 April 2019 when the NRCGT regime was expanded. From this date non-resident companies became subject to corporation tax on gains from UK property. This meant a reduction in the tax charge for companies holding UK residential property from 28% to the corporation tax rate (currently 19%).

Inheritance Tax (IHT)

New rules were introduced from 6 April 2017 so that UK residential property held directly or indirectly by non-UK domiciled individuals now falls within the scope of UK IHT.

Previously, a non-UK domiciled individual could avoid UK IHT by holding UK property through a trust or company. This resulted in many non-UK domiciled individuals using offshore structures to hold UK residential property.

Privacy

The UK maintains a register of all real estate which is accessible by the public. However, it currently only reveals the name of the legal owner of the property, which would be the offshore company or /trust if held that way.

However, the UK is planning to introduce in 2021 a requirement to disclose the beneficial owner of a company or trust which owns UK real estate.