Key takeaways
Taxes apply at every stage of ownership
From purchase to sale, plan carefully to reduce exposure.
Stamp duty surcharges impact non-UK buyers
Rates vary by property type, buyer status and residency.
Specialist advice is essential for structuring deals
Proper planning helps mitigate income and capital gains tax.
UK real estate has always attracted significant international investment. However the recent budget created more hurdles for both UK and non-UK residents looking at real estate investment.
Taxes are levied on acquisition, holding, rents, development profits, capital gains on sale and death of direct and potentially indirect owners, so it is imperative that any investment in UK real estate is structured carefully in order to mitigate UK tax.
We have highlighted below the taxes which stem from the ownership of UK real estate. This is intended to provide a general guide only and we would recommend specialist advice is sought before any investment in UK real estate.
Relevant taxes
Purchase Tax - Stamp Duty Land Tax (“SDLT”)
All UK properties, whether residential or commercial, attract SDLT, which is a purchase tax due on acquisition.
The amount payable is a percentage of the purchase price, or market value if the price is discounted, and it is charged on a sliding scale from 0% to 17%.
It also takes account as to whether the buying entity is an individual or corporate, and the buyer’s tax residence and ownership of other assets, which could increase the rate to 19% in some cases.
Purchase price
Residential Property (Special Rules and rates may apply when buying mixed use properties or if there are multiple purchases or transfers between the same buyer and seller) (% of purchase price)
Commercial Property (% of purchase price) Up to £150,000 0%£150,001- £250,000 2%£250,001 + 5%
Up to £125,0000% £125,001 - £250,0002% (The 2% rate will apply from 1 April 2025.) £250,001- £925,0005% £925,001 - £1,500,000 10% £1,500,001 +12% £500,000 + (17% rates apply to a corporate purchaser of a residential property, unless the corporate qualifies for relief such as property rental business, property developer/trader, etc. in which case the normal rates apply with an additional 5% surcharge)17%
Higher rates for additional properties – An extra 5% is charged if buyer has another residential property.
Non-UK Resident Surcharge – An extra 2% is charged if the buyer is not a UK resident.
First Time Buyers – The SDLT rate for first-time buyers buying a residential property worth up to £425,000 is 0% on the first £300,000 and 5% on the portion between £300,001 to £500,000 (Will apply from 1 April 2025, until that time first time buyers will benefit from relief on properties worth up to £625,000, with the initial £425,000 taxed at 0% and the rest at 5%).
Income Tax
Rental income generated from UK real estate is subject to UK Income Tax.
The rate will depend on the recipient’s marginal rate; and range from 20% - 45%
for individuals and Trust and 19% - 25% for corporates.
The tax is due on the net rental income.
The proceeds of sale of a development property will also be subject to Income Tax rather than Capital Gains Tax, provided the property was developed or renovated and sold on for a quick profit.
Annual Tax on Enveloped Dwellings (“ATED”)
An annual charge known as ATED applies to corporate entities owning residential properties used for the benefit of the corporate’s owner or their families.
The charge applies annually to properties valued at £500,000 or more:
Property ValueAnnual Charge 2024-5Annual Charge 2025-6£500,001 -
£1m£4,400£4,450£1m - £2m£9,000£9,150£2m - £5m£30,550£31,050£5m -
£10m£71,500£72,700£10m - £20m£143,550£145,950£20m +£287,500£292,350
Capital Gains Tax (“CGT”)
A sale, or gift, of a UK property usually triggers CGT on the gain.
The gain is the difference between the cost of acquisition and improvements, and the net sale proceeds, or market value in case of a gift.
The same rates are applicable to commercial and residential property alike
as follows:
Rate
Individuals (A non-resident only pays tax on gains made since 5 April 2015) 18% (10% for gains qualifying for Business Asset Disposal Relief) or 24%
Corporates (Subject to Corporation Tax and applicable to Non-UK corporates since April 2019) 19% to 25%
If the property is used as a main residence, any gain on its sale is usually
exempt from CGT.
Business asset disposal relief results in the rate of CGT for eligible
individuals being reduced in respect of £1 million of the eligible chargeable
gains across the individual’s lifetime. The rate of the relief is set to
increase incrementally over the following years as follows:
YearRate of BADR (%)2024-5102025-6142026-718
Inheritance Tax (“IHT”)
The net value of UK real estate held by individuals, even if such an individual is not UK resident or domiciled, will be subject to UK IHT at a rate of 40%.
There are certain reliefs and exemptions from IHT, such as the nil rate band allowance, currently £325,000, and a general exemption from tax on transfers between spouses or civil partners.
UK residential real estate held by foreign companies may also be subject to UK IHT on the death of the shareholder.
Summary
UK real estate continues to represent an excellent investment opportunity for non-UK investors.
Structured carefully, the UK and international tax can be minimised. There are also opportunities for collective investment in UK real estate within tax-efficient structures.
With MIPIM arriving soon, the Hill Dickinson team is looking forward to discussing UK real estate investment and similar topics further with those who are interested to hear more.
