Key takeaways
Structuring investments to reduce UK tax exposure
Careful planning helps minimise tax on purchase income and sale.
Understanding stamp duty and income tax rules
Rates vary by property type, buyer status and residency.
Capital gains and inheritance tax implications
Non-residents face UK tax on gains and property value at death.
UK real estate has always attracted significant international investment.
Investment in UK real estate must be structured carefully in order to mitigate UK tax on acquisition, income and gains on sale, as well as other taxes which apply to UK real estate.
Taxes are levied on acquisition, holding, rents, development profits, capital gains on sale and death of direct and potentially indirect owners.
This guide examines the taxes which stem from the ownership of UK real estate. This guide is intended to provide a general guide only. Specialist advice must be sought about your specific circumstances.
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 (% of purchase price) (Special Rules and rates may apply when buying 6 or more residential properties in one transaction or if there are multiple purchases or transfers between the same buyer and seller.) | Commercial property (% of purchase price) |
|---|---|---|
Up to £150,000 | 0% | |
£150,001 - £250,000 | 2% | |
£250,001+ | 5% | |
Up to £125,000 | 0% | |
£125,001 - £250,000 | 2% (The 2% rate will apply from 1 April 2025.) | |
£250,001 - £925,000 | 5% | |
£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% (Corporate purchaser) |
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, which is the gross rent less various deductible expenses, such as management expenses, insurance, repairs and maintenance, the costs of finding new tenants and, in some cases, related loan interest.
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 value | Annual charge 2024-5 | Annual 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:
Purchase price | Rate |
|---|---|
Individuals (a non-resident only pays tax on gains made since 5 April 2015) | 18% (for gains qualifying for Business Asset Disposal Relief) or 24% |
Corporates (subject to Corporation Tax) | 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:
Year | Rate of BADR (%) |
|---|---|
2024-5 | 10 |
2025-6 | 14 |
2026-7 | 18 |
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.
Hill Dickinson: Tax and Private Client
Hill Dickinson LLP is a leading commercial law firm with more than 1,000 people, including over 200 partners and legal directors, spanning offices in Birmingham, Hong Kong, Leeds, Limassol, Liverpool, London, Manchester, Monaco, Newcastle, Piraeus, Singapore.
Established in 1810, we have been providing expert legal advice for centuries. As a full-service firm, we support clients throughout the life cycle of their business and their personal wealth.
Our Tax and Private Client team specialises in advising capital and income tax planning, international and UK business structuring, taxation of owner managed businesses, the creation and administration of trusts, foundations and corporate entities, compliance, tax enquiries and advising employers and employees on share schemes and tax consequences of international assignments.
The Team
David Klass - Advises on the structuring and the execution of a broad range of transactional work, including real estate and corporate (M&A, private equity, venture capital and capital markets), banking and finance, fund structuring and general commercial contracts.
Hed Amitai - Specialises in asset structuring for capital tax planning and wealth preservation. He has considerable experience in tax and legal issues which international wealthy entrepreneurs and their families face in managing their wealth and their businesses and in transitioning wealth between generations.
James Odds - focuses on mitigating the exposure to UK taxation for clients and also assists with clients’ compliance requirements.
Relevant Experience
Advising on the structure of £100m real estate lending fund, with non-UK based investors;
Advising on the structuring of a student accommodation portfolio worth around £1 billion with foreign investors;
Advising on the ownership and structuring of a residential property portfolio with £120m for a single family;
Advising on the restructure of a real estate investment company worth £250m to create long term capital tax savings.
For further information and support, please get in touch.
