If you are an overseas investor looking to acquire a piece of UK real estate as part of your investment portfolio or looking to buy in order to relocate, you will need to make sure you buy the property in the most tax efficient way possible.
Regardless of whether you want to buy a domestic or commercial property, it is crucial that you set up the purchase details so that you donâ€™t face a tax headache that could possibly have been avoided.
When you look at the properties that are available for rental through a resource like www.hamptons.co.uk/toletoffice/fleet/1968/ amongst others, you will see that there are opportunities to generate a rental income that may well provide a reasonable ROI.
One of the most important points to note about buying an investment property in the UK, is that income tax will be charged on income generated from letting a property, regardless of your residential status.
You should consider taking professional advice on what this will mean to you in terms of tax liabilities and get a detailed explanation of how the tax is calculated.
The tax liability is calculated using basic accounting principles so income and expenses are taken into account on an accrual basis. Certain expenses you incur as a landlord are tax deductible, so you should be able to reduce your tax liability by offsetting expenses such as repairs, maintenance, insurance and property management fees, against income earned from the investment.
If you take out a loan to buy the property, the interest payable should be tax deductible. It can sometimes work out to be more tax efficient to take a loan to buy a property in the UK even if you have the capital available to purchase outright, so check with your advisor whether this could be the best way to buy for you.
What you will not be able to claim
There are some aspects of UK tax law that will not allow you to reduce your liability, such as capital expenditure.
If you make specific improvements to your property rather than repairs and maintenance, this will be viewed as capital expenditure and is not deductible from rental income. However, this capital outlay will be accounted for as an additional cost to be taken into account when calculating your financial gain upon disposal of the property.
You wonâ€™t get tax relief for depreciation or amortization of the property itself, although if you buy a commercial property, capital allowances, which are in effect the same as depreciation at a low standardized rate, are available for certain elements of the property.
This means that any plant and machinery expenditure could provide some valuable tax relief, but this often requires negotiation with the tax authorities, so get advice on this aspect of taxation if you are planning to buy a commercial building.
There are some advantages to owning a UK property as an overseas resident and in general terms, capital gains tax is only payable by someone who is classed as a resident of the UK.
If you make a financial gain on your investment property when you sell it, you should be able to avoid a UK tax liability regardless of whether it has been used as a home or let out to tenants.
There are exceptions to this rule and if the property is deemed to be residential or owned by a non-natural person, or exceeds £2 million in value. If you do fall into a taxable category, the normal rate of capital gains tax that you can expect to pay is 28%.
Any gains made on commercial property investments are expected to remain outside of the scope of UK taxation laws, but as always, take specific professional advice in order to avoid a problem at a later date, or an unexpected tax liability.
Paying tax due
A UK resident landlord is expected to file a tax return to the HMRC for the tax year, which runs from 6th April to the 5th April of the following year.
The tax payable is normally paid in advance of filing the return and payment is required in two instalments, on the 31st January and the 31st July. It is often beneficial for a non-UK resident to apply for the same tax treatment as a UK landlord, as the collection regime becomes more stringent outside of this standard arrangement.
If you are considering investing in a UK property, it makes sound financial sense to get some advice on your tax situation and potential liabilities, so that your property investment is as tax efficient as possible.
Donna F. McIntyre is a property investor and consultant. She loves writing about the real estate field online. Her articles are available mainly on real estate management and investing websites.