In 2016, I prepared an article on individual and property taxation in the UK for Abode2. I reproduce the original article below. The reproduced original article now shows headings and visa categories were updated to reflect changes made in UK immigration legislation.
With property investment in many locations increasingly linked to residency status, good tax planning is essential and nowhere more so than in the UK.
Residence and citizenship based on investments made in property
Ten years ago, if you were looking to invest in a bolt-hole in a country where you could automatically qualify for residency, pickings would have been slim. Today, more than 20 countries offer residency or citizenship through the acquisition of property. Growing wealth in emerging economies, coupled with ease of international travel, banking and communication, have fuelled demand for a new life in foreign climes.
Basic international tax rules when taxing individuals in a host country
Nearly every jurisdiction taxes individuals who are resident and non-resident individuals if they source income or capital from that jurisdiction. Those tax systems that are based on citizenship, domicile and residence, tend to tax individuals on their worldwide income and assets. The ultimate right to tax rests with the country where the individual has a permanent home, the centre of vital interests, habitual abode or nationality with presence in the territory for 183 days the standard period of time for residency status to apply. In the case of the UK, the government has a statutory residence test in place to determine qualification as a UK resident. This evaluation comprises three parts: the automatic overseas test, automatic residence test and the sufficient ties test.
Investments in UK property and your UK tax status
An individual who owns a home in the UK qualifies as ‘resident’ under the automatic residence test. Having accommodation available in the UK is considered a ‘tie’ under the sufficient ties test. In both cases – the tax year can be split with the individual found to be non-resident for part of the year and resident for the remainder. The system of taxation is also based on domicile, with three categories in play: domicile of origin (father’s domicile), domicile of dependence (children under the age of 16 or as a married woman married before 1 January 1974), and domicile of choice. A newcomer with no previous ties to the UK can become domiciled in the UK, if the intention is made to remain permanently and sever ties with their country of origin.
Taxation of Non-domiciled and non-resident individuals in the UK
Individuals who are not domiciled and not resident, but own and let real estate in the UK, incur UK income tax on rental income. Capital gains tax applies only to UK residents if they sell their UK assets. Anti-avoidance provisions apply. Each tax year, individuals who are resident, but not domiciled in the UK, may choose to be taxed on a remittance basis. This means they are taxed on overseas income and capital gains only if these are brought to, or enjoyed, in the UK. Individuals who do not make this claim, are taxed on an arising basis on all worldwide income and capital gains. Long-term residents who claim remittance are liable for remittance charge.
Remittance basis of taxation and your bank accounts
Non-domiciled individuals resident in the UK and claiming remittance basis are advised to maintain separate bank accounts offshore for non-taxable capital, foreign capital gains and foreign income. Failure to do so creates a mixed fund, which results in higher rates of taxation on funds remitted to the UK.
Business investment relief
Non-domiciled individuals resident in the UK who bring funds to the UK for business investment purposes, may claim business investment relief. Any foreign income or gains brought to the UK are treated as not remitted.
UK Inheritance Tax
Under UK inheritance tax rules, an individual who was resident in the UK for at least 17 out of 20 tax years, or if that individual was UK domiciled at any time in the past 3 previous years, is deemed domiciled in the UK. Their worldwide assets will therefore be subject to UK inheritance tax.
Inheritance tax situs rules apply to property located in the UK. Real estate owned by an overseas individual is taxable in the UK even if the individual is not resident and not domiciled in the UK.
Investor and Innovator visas for foreign nationals
In the UK, foreign nationals can obtain an investor’s visa (investment of £2m in UK government bonds) or innovator visa (£200,000 investment in business), but investments in real estate do not qualify.
After this article was published, significant changes were made in the UK tax code that affect the taxation of UK real estate held in structures by foreign individuals and investors.
You currently own investments in real estate in the UK or are considering acquiring your own property investment portfolio and need to plan your tax exposure in the UK better, book a consultation with me.
Saule Voluckyte, M.A.E.S, LL.B, FAIA
I have been working exclusively with UHNWI in Mayfair, London since January 2008. I built specialist knowledge and expertise required to serve ultra high net worth individuals investing, operating and relocating to the UK or Switzerland.
Within the industry, I am the single adviser who is able to traverse the different areas of expertise and bring a comprehensive approach across: global structuring, UK immigration, international taxation and FOREX to develop their global wealth strategy, while they build, grow and expand their wealth worldwide.
Previous experience as one of the senior advisors for the government, made me a go-to person when delicate and uncomfortable scenarios involving heads of state need to be handled with care and preserve privacy.