Rental income
Individuals are liable to income tax on any rental income received. Where a letting agent is used, they are required to deduct tax at 20% of the rental income less certain expenses before the rent is paid to a non-resident landlord. Where no letting agent is used, the onus to deduct tax at 20% falls on the tenant. To receive the rental income with no deduction of tax, the individual must register with HMRC under the Non-Resident Landlord scheme. BDO can assist with this registration: more information can be found here about how BDO can assist you with completing your tax return.
Companies are liable to corporation tax on rental income – more information can be found here.
Annual Tax on Enveloped Dwellings (ATED)
In brief, ATED is an annual tax on residential properties held by ‘non-natural’ persons (i.e. this includes companies). It applies when the value of the property is more than £500,000. There are some reliefs and exemptions but even when they apply a return must be filed annually. Read more here.
Value Added Tax (VAT)
Sales and lettings of property are generally exempt from VAT, but where an option to tax has been made on commercial property, VAT is charged at the standard rate. The standard VAT rate is currently 20%, and for 2024/25 registration for VAT is required where taxable supplies (standard rated, reduced rated or zero-rated) exceed GBP 90,000.
The first sale of a freehold or the first grant of a long lease in new residential property by the person constructing (or converting from commercial) that property is zero-rated. Other sales or letting of residential property are exempt from VAT. Where a property disposal or letting is exempt, no VAT is chargeable on the rent or disposal consideration, although VAT suffered on associated costs cannot be reclaimed.
The freehold sale of new commercial property (fewer than three years old) is subject to VAT at the standard rate. Other sales or lettings of commercial property are exempt from VAT, subject to the option to tax.
When making an option to tax, consideration needs to be given both to the impact on the seller/landlord’s VAT recovery position and to the buyer/tenant’s VAT position. Certain disposals of commercial Investment property can qualify as business transfers (TOGC) and will be free of VAT.
Council Tax
UK residential property (subject to some exemptions) is liable to a local property tax based on the value of the property – there are up to 8 bands (9 in the Wales) with the local authority able to set the annual charge for each band to cover the cost of local services. On commercial property, the Local Authority charges Business Rates to be paid by the occupier although there are some exemptions for certain businesses and organisations.
Inheritance Tax (IHT)
In the 2024 Spring Budget the Government set out proposals to abolish the current tax treatment for UK resident non-domiciled individuals (non-doms) from 6 April 2025. After which a new residence only based regime will apply. Read more about the changes here.
As part of the changes to the tax treatment for UK resident non-domiciled individuals, there will also be significant changes made to the operation of UK Inheritance Tax, the details of which are unknown at this time.
Currently, on death, non-UK domiciled individuals are liable to IHT at a rate of 40% on the value of all their UK sited assets, for example a UK home. However, transfers between spouses/civil partners – including on death – may be exempt from IHT, depending on their domicile status.
Where assets are chargeable to tax the first of £325,000 of the total value is effectively ignored (it is called the nil-rate band (NRB)). An additional nil-rate band is available when a residence is passed on death to a direct descendant, or when a person downsizes or ceases to own a home and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants. The additional nil-rate band is £175,000. There is a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2,000,000, at a withdrawal rate of £1 for every £2 over this threshold.
Surviving spouses and civil partners can claim the proportion of the NRB and additional NRB that was not utilised by the deceased spouse or civil partner.
Companies are not subject to IHT. Therefore, many non-UK investors have in the past used offshore holding companies to avoid IHT. However, since April 2017, all UK residential property held directly or indirectly by foreign domiciled persons is subject to IHT. This applies even when the property is owned through an indirect structure, such as an offshore company or partnership.
