Tax Considerations for Non-residents buying UK Commercial Property
This information has been prepared by Sykes Anderson Perry Limited as a general guide only and does not constitute advice on any specific matter. We strongly recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of any information or advice given or omitted. The information herein does not constitute investment advice. Always consult an IFA if before taking any investment decision.
There are many UK tax implications when purchasing property in the UK. The consequences tend to be different depending on the type of property which you are purchasing, be it commercial or residential. Commercial property in London is in high demand at present. The rental returns which can be achieved offer significantly better yields than for residential property and this is making commercial property extremely attractive to non-resident investors.
From a legal perspective there are numerous differences between the purchase of residential and commercial property and specific advice must be sought on this from the outset. This note is a basic starting point on the tax matters.
General Tax Points
The first point to note is that the recent aggressive tax changes from the UK government including the 15% stamp duty land tax rate, annual charge and capital gains tax on non-residents apply only to residential property. This means that it is still relatively straightforward to put in place a structure which is efficient for UK inheritance tax purposes (generally involving an offshore company).
This structure will need to take into account the tax on the rental income and on any capital gain. These are all important points and advice should be sought on all individual cases. The rental for example will be subject to UK income tax or corporation tax depending upon the structure – you will need to consider the differences here between personal ownership, ownership in an English company, or ownership in an offshore entity. It will also be worth considering whether the tax on the rental will be mitigated by any borrowing.
The tax which tends to be the most complex and confusing for non-residents is VAT and this is considered in more depth below.
VAT on property
The general position in the UK is that VAT is not charged on property transactions. However, there are certain exceptions to this where VAT must be charged. This will generally be the case only where there is a disposal of new-build commercial properties.
It is also possible for a VAT-registered person (individual or company) to exercise an option to tax a commercial property. When this option has been exercised and has not been revoked, the supply of the property (including a sale or a letting) is subject to VAT. The current rate of VAT in the UK is 20%.
Please note that if the property has some residential parts, the position will vary from that set out below.
Buying a property on which the option has been exercised
If you are buying a commercial property which is subject to VAT you have a decision to make. Although your seller has exercised the option to tax at the building, you are not bound to follow suit. You may choose to not exercise this option, in which case you will suffer the VAT on the purchase price as a business expense. You will not have to charge VAT on the rents paid by the tenants. You will not be able to recover any VAT you incur on works to the property.
Opting for tax means that you have the benefit of recovering any VAT, which you incur on expenditure to the property i.e. on improvement costs and refurbishment etc. You have to charge VAT on the rental. When you come to sell the property on which you have opted to tax, it is necessary to charge VAT on the sale price. Above all though, this should allow you to treat the purchase as a transfer as a going concern.
Transfer as a going concern
When a property is sold as part of a transfer of business, it is possible to gain an exemption from VAT if the seller is registered for VAT and has opted to tax the property and the buyer is also registered for VAT, will carry on the same activity at the property and will exercise the option to tax the property once they are the owner.
In this case, no VAT is paid on the transaction. HMRC accepts that the transfer of a property constitutes a transfer of a business for these purposes. Care must be taken and advice sought on the purchase documentation to ensure the transaction is treated as a transfer as a going concern.
The decision on opting to tax is not straightforward – there are potentially negative implications. Once you have opted to tax and claim a transfer as a going concern it will not be possible to revoke the option. Only after 20 years does the revocation become possible and even this would require the permission of HMRC if the property is still held at that time.
You also have to charge VAT on the rents. If your tenant is not VAT registered this will be an expense to them which may make the property unattractive. You may take the view that in all likelihood your commercial tenants will be VAT registered.
As mentioned above, you must charge VAT on your onward sale and, again, if you are selling to someone who is not VAT registered it may be unattractive meaning the price you can achieve is significantly reduced.
If you do wish to take the VAT route, you have to register for VAT either online or by post with HMRC.
After registration it will be necessary to notify HMRC of you exercising the option to tax. The option can be exercised via fax or e-mail as well as by post.
VAT on Rent
As set out above, you will have to charge VAT on the rental income. You will also need to charge VAT on any aspects such as service charges, insurance rent etc., the charges for which are passed on to the tenant.
In practice, you should issue VAT invoices to the tenants setting out the amount of VAT payable so they will be able to recovery this.
In all cases you should obtain specific advice on the VAT and other tax implications of your purchase. We can assist with all these aspects as well as the purchase of the property.
Sykes Anderson Perry Limited