Should I establish a non-UK resident company to acquire UK property?
It used to be clear that non-UK residents planning to invest in UK property would generally choose to do this through a non-UK tax resident company rather than a UK tax resident company. However, this is no longer necessarily the case. This article seeks to explain the current position.
(Unless a company is UK incorporated its tax residence will generally depend on where it is centrally managed and controlled. This is normally where its directors meet and make strategic decisions. Please see my recent article for further discussion about this.)
For commercial real estate, the position began to change in 2019 when non-resident capital gains tax ("NRCGT") was imposed on non-residents disposing directly or indirectly of UK commercial properties. The new rules applied from 6 April 2019 (and they followed on from the introduction of NRCGT in relation to residential property from 6 April 2015).
As a result of the introduction of NRCGT there is now, from a capital gains perspective, no significant difference between holding property and disposing of it out of a UK or non-UK resident company (although purchasers of existing property-owning vehicles should be aware that there could still be significant differences between the base cost at which property is held within such companies since rebasing to 2019 values for commercial property (and 2015 for residential property) only applies if the company was non-UK resident at the relevant date).
Tax on rent
Since 6 April 2020, there has also been an alignment of the tax treatment of income (other than in relation to withholding tax described below). UK corporation tax now applies to rental income of UK property investment businesses whether or not the company holding the property is UK resident or non-UK resident. The same rules also apply for interest deductions under the UK's loan relationship/corporate debt rules.
If rent is to be paid to a non-UK resident company it will be necessary to make an application for rent to be paid gross; otherwise the tenants (or agent collecting the rent) will need to deduct 20% tax from the rent and account for this to HMRC before paying it over to the non-UK resident company. However, if a UK resident company is used, the tenants or agent will be able to pay gross and the rent will then be subject to corporation tax self-assessed in the usual way. The contrasting position between non-UK resident companies and UK resident companies continues to apply in relation to withholding tax on rent even though both types of company are now within the corporation tax regime.
Withholding tax on interest
The main reason therefore, to now choose to establish a property-owning vehicle as a non-UK resident company relates to withholding tax on interest, particularly if interest bearing shareholder (or connected party) debt is to be introduced into the structure. This is because, unless an exemption or relief applies, a UK withholding tax of 20% is incurred if UK source interest is paid by a company. One such exemption is where interest is paid to a UK bank or to a lender which is resident in a country which has a double tax treaty between the UK and that country that exempts interest from withholding tax. Care still needs to be taken however, because in some cases, double tax treaties only reduce the rate of withholding tax rather than providing a complete exemption and some double tax treaties do not exempt or relieve interest from withholding tax at all.
Where there is a double tax treaty which can be relied upon, compliance with various procedural requirements will be needed before the interest can be paid gross; these will vary depending on whether the lender is a “passport treaty lender” or not. As such, specialist advice should be taken.
The withholding tax only applies to UK source interest. If interest is paid by a UK resident company it is highly likely to have a UK source. But, if interest is paid by a non-UK resident company then, depending on the exact circumstances (such as whether or not the debt is secured on a UK property), it may be possible to take the view that the interest does not have a UK source. Whether interest has a UK source or not involves an analysis of relevant case law and HMRC guidance and a multi factorial approach has to be taken. Specialist advice should be sought in this situation.
Debt borrowed from third parties will almost invariably be secured on UK property and will therefore have a UK source. If double tax treaty relief does not apply to exempt the interest from withholding tax then it is likely that tax will have to be withheld on payment of interest to such an offshore lender, whether the borrower is UK resident or not.
If there is a concern that the interest may have a UK source, it may be possible to structure the debt as a deep discount bond or to issue a quoted Eurobond as withholding tax should not apply to such bonds, although it is unlikely to be worth the cost of issuing a quoted Eurobond unless the amount of debt is at least £10 to £12 million.
Notwithstanding the above, our understanding is that, from a commercial perspective, bank lending can be more expensive for a non-UK resident borrower than if the borrower is a UK resident company. We would suggest checking this in advance with any potential lender.
A non-UK incorporated (note, “incorporated” rather than “resident”) company is sometimes chosen because UK stamp duty at the rate of 0.5% applies to consideration paid on a transfer of shares in a UK incorporated company. However, this is only likely to be a relevant consideration if it is thought that the shares in the company (rather than the actual property) might be sold at a future date.
Non-resident SDLT ("NRSDLT") has also recently been introduced which imposes a 2% surcharge for non-UK resident buyers of dwellings. Even if the buyer company is established as a UK resident company, it could still be treated as non-resident for the purposes of this surcharge if, broadly, it is a close company which is under what is known as "non-UK control". These rules are complex and if residential property is being purchased, specific advice should be sought.
For further details about NRSDLT, see here.
There are a variety of other structures which can be used where UK property is to be held as an investment, including offshore unit trusts and partnerships. Establishing a real estate investment trust ("REIT") to which special favourable tax treatment applies may also be an option where property of significant value is being acquired. Again, specialist advice should be taken.
UK inheritance tax and privacy issues
This article does not consider UK inheritance tax. If you are non-UK domiciled and investing in UK property you should take specific advice and note that the rules are different for residential and commercial property.
Some non-UK residents also prefer to establish non-UK incorporated companies as the amount of information about the company available to the public may be lower than if it was established in the UK. Again, this is a complex area in relation to which specific advice should be sought.
Heather Corben is a Partner in the Tax team.
This note reflects our opinion and views as of 29 September 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.
When acquiring UK property, US purchasers should seek advice on the broader tax and legal implications. In this report, Forsters’ partners along with specialists in the industry, share their insights on the current UK market for US buyers and how best to navigate the specific risks for US-connected clients.