Typically a non-UK company used to hold UK property is located in a low tax jurisdiction, such as the Channel Islands, Cayman or the BVI. There is usually no tax charged in the jurisdiction of incorporation. When a non-UK company is used, it is very important that the board is not UK-based, that the company is run by the board, and that board decisions are taken outside the UK so that the company does not become UK tax resident.
UK rental income received by a non-UK company (after deduction of allowable expenses including interest on loans to the non-UK company for the purpose of acquiring the properties) is subject to UK income tax at the basic rate (currently 20 per cent). There is an obligation on the person paying the rental income to a non-UK resident landlord to withhold tax at the basic rate from such payments, unless the non-UK company is registered with HM Revenue & Customs (HMRC) as a non-resident landlord. This is usually a straightforward application, the effect of which is that payments can be made without any withholding, and the company remains liable to account for the UK tax on the net rental income.
Currently, non-UK resident companies are exempt from paying UK capital gains tax on any gains made on disposal of property (except in certain cases where the property is a residential dwelling worth over £500,000 and is available for occupation by the owner or a connected person).
With effect from April 6, 2015, this position has changed for residential property owned by companies the shares in which are not ‘widely held’. There are no plans currently to charge UK capital gains tax on disposals of commercial property held by non-UK companies as an investment.
It is common for internal gearing to be introduced, by having a non-UK holding company which owns 100 per cent of the shares in another non-UK company which owns the property. The holding company would typically raise equity which is passed on to the property holding company by means of a mixture of debt and equity. Provided that the debt is on arm’s length terms and the property holding company is not thinly capitalised, the interest payments on the debt should be deductible in computing the liability to tax on the rent. Care is required to avoid the possibility of UK withholding tax on the interest payments.
The tax treatment of any non-UK resident shareholders will be governed by the legislation of the jurisdiction in which they are resident. If the property holding company is established in a tax haven, it is unlikely that there would be any withholding taxes.
It is generally possible to sell the shares in a non-UK company without incurring a liability to pay UK stamp duty or stamp duty reserve tax.
Capital gains tax for non-residents: key points
- Gain arising on UK residential property held by non-UK residents will be subject to UK capital gains tax with effect from April 2015.
- This does not affect commercial property held as an investment.
- The tax charge will not apply where the property holding vehicle is ‘widely held’.
- The tax charge will only affect any increase in value from April 2015.
- The rates of tax are 18% or 28% for individuals and 20% for non-UK companies.