If you’re thinking about buying property in the UK, either as pied-a-terre or as an investment, it’s important to understand how the UK tax system applies to you. And whilst there are no legal restrictions on the purchase of UK residential or commercial property, there are a few practical and taxation issues that you should consider.
Property ownership here can be a valuable part of your wealth strategy, but for international individuals, it also brings complexity. Recent tax reforms have added to that complexity. You may now face increased Stamp Duty charges, higher Capital Gains Tax on property sales, and additional scrutiny around Inheritance Tax. These changes are leaving many people feeling uncertain about how best to structure their investments and safeguard their estates.
To help, we’ve answered some of the most common questions we receive from international clients purchasing property here. While everyone’s circumstances will be different, and individual advice is essential, this guide outlines some of the key issues to consider. Where you are looking to purchase UK property as a family home, then the considerations are different and have been separately covered in our other publication.
What’s the difference between freehold and leasehold?
As with many jurisdictions, the UK has longstanding property holding rules. The key difference between freehold and leasehold relates to the land on which the property has been built. Freehold means that you own both the land and the property, though with a leasehold you will own the property for a set period, but not the land, which is owned by the freeholder. At the end of the lease the property reverts to the freeholder. As such, a freehold property will generally have greater value than a leasehold property. Leaseholds are most commonly seen with flats, though a leaseholder, typically with others in the same building with flats, does have a statutory right to purchase the freehold.
Will I need borrowing, and can I get it?
If you have not been UK resident, you may not have built up a credit history in the UK. Whilst this is not an issue, it will inevitably create some additional complexity and work for any potential lender. Additionally, this could decrease the loan to value ratio that could be sought. With regulated lending in the UK, each lender is required to apply certain affordability criteria to any proposal. Where borrowing is required, it is always recommended to engage early in the process as each lender will have a different appetite to lending, the properties they lend on, whether this is freehold or leasehold property and the terms of that lending.
What property acquisition taxes are due?
The UK property acquisition tax, Stamp Duty Land Tax (SDLT), has undergone a transformation in the last ten years. For residential property, it is charged on a slabbed basis up to an incremental rate of 12% when the purchase price is more than £1.5million. If the purchase of the property means that you will own more than one property, then HM Revenue & Customs
(HMRC) will apply a 5% surcharge to the whole of the property purchase price. In addition, a 2% surcharge will be added if you are not resident in the UK when the property is purchased. For these purposes, you will need to have been present in the UK for at least 183 days during the year before the purchase date to avoid this additional 2% rate. If you become resident under this test after you have purchased the property, then you can apply for a repayment of the 2%.
For commercial property, a lower rate of SDLT applies, which is capped at 5% when the purchase price is more than £250,000. It should be noted that certain agricultural properties can qualify for the lower non-residential SDLT rates, though advice should be sought in advance of a purchase.
SDLT can be a significant initial outlay, so this should be calculated in advance as a lender will not include this in their calculation of the property’s value.
Can I mitigate property acquisition taxes?
Yes, in certain circumstances. If you are retaining a property outside the UK and acquiring a residential property, then the additional 5% surcharge could well be due. This could be refunded where the other property was the family home and is sold following a relocation to the UK. However, if the intention is to retain and potentially let out the property outside the UK, then consideration should be given as to how this is owned. It is therefore important to engage on this in advance of a purchase of UK property as there are steps that can be taken to avoid the imposition of this surcharge.
Can I purchase this through a company or a trust?
Purchasing a property through either a UK resident or non-UK resident vehicle will create additional tax complications and liabilities so will not always be suitable. The tax consequences will depend on a wide range of factors, including whether you are resident in the UK, whether the UK property is purchased by the entity or a loan made to the beneficiary to acquire the property (and the terms of that loan) and whether there is a mixture of owners. Where there is a purchase of property in circumstances where a company or trust involved, it is imperative to take advice as the mechanism will have a significant bearing on the taxation consequences.
If I sell my property at a profit, do I pay tax on this?
Following rule changes in 2015 and 2019, the UK does tax non-residents on capital gains realised on the sale of UK real property. If you have acquired residential property in the UK before April 2015 and are non-resident when sold, or non-residential property before April 2019 , then the UK will allow the base cost of the property to be rebased to its market value in 2015 or 2019 as appropriate. Any gain will be assessed to UK tax, either as capital gains tax or as a corporation tax with rates around 24% or 25%. In computing the base cost of the property, we would include the associated costs of purchase (including SDLT), and for the sale, we would deduct the associated costs of disposal for the proceeds.
Where there is tax due on a sale, there is a requirement to file a separate Tax Return and settle any taxes due within 60 days of the sale.
Letting out UK residential or commercial property
Where rental income is received on UK residential or commercial property, the UK will retain primary taxing rights over the net profit. Unlike some jurisdictions, the UK does not allow depreciation as an expense in computing net taxable profit. With certain commercial property, you may be able to claim tax approved depreciation (called capital allowances) on certain plant and machinery in the building. In addition, for non-residential properties, you may be able to claim structures and buildings allowance tax relief. In advance of purchasing a property, it is important to engage to ascertain available reliefs.
Tax Returns will need to be prepared and filed with HMRC. In advance letting out the property, it is important to engage with any lender to ensure that this is agreed within any borrowing arrangements. Generally, interest incurred on borrowings secured on let property is deductible, though tax relief can be restricted for individual higher rate taxpayers. As noted above, if the property is sold when the owner is not resident, then there would be a requirement to file a Tax Return and settle tax within 60 days.
What about UK estate taxes? How do these work?
On a personal level, the general starting point is that UK residential and commercial property is within the scope to UK Inheritance Tax (IHT) regardless of where an individual owner lives or their domicile position. Where borrowings are secured against UK property to enable this to be purchased, then UK IHT will be levied on the equity element. However, if later borrowing is added, a deduction for UK IHT may not be available, so separate advice should be sought. There are circumstances where the purchase arrangements could create an IHT exposure in the UK, such as where the property is purchased through a family trust or using a loan from the family trust.
Where property is owned in the UK by an individual, it is generally recommended that there is a separate UK Will dealing with the devolution of that asset on passing. Where there are assets owned in various jurisdictions, it is important that this is considered as part of an individual’s wider Estate plan.
Where UK residential and commercial property is acquired via a non-UK entity, such as a company or a trust, then separate IHT advice should be sought as the structure will determine whether there is any exposure.
Expert tax guidance for peace of mind
Whether you’re relocating, investing, or managing your estate, we’ll help you make decisions that protect your wealth and give you peace of mind. Our Private Client Tax team brings together deep UK expertise and international insight, supporting you with:
- Pre-arrival and pre-departure planning
- Property structuring and investment advice
- UK personal tax, trust, and corporate advisory
- Offshore tax advice through our global network
- Estate planning and inheritance tax support
We take the time to understand your goals, and offer clear, practical advice tailored to your circumstances, so you can focus on what matters most.
Talk to our team If you’re planning a move to the UK or looking to invest here, get in touch to arrange a confidential conversation with one of our experts.
