The United Kingdom has long been an attractive destination for overseas high net worth individuals (HNWIs) seeking to invest in residential property. Historically, many of these investors utilised offshore companies to hold their UK real estate, benefiting from various tax advantages including the ability to completely shelter the underlying UK property from UK inheritance tax. However, over the last decade, the UK has introduced significant changes to its tax legislation, aiming to increase transparency and tax revenue. These changes have had a profound impact on overseas HNWIs holding UK residential property through offshore structures. In this article, we outline several key changes within the evolving landscape of UK residential property taxation and its implications for HNWIs.
The Changing Tax Landscape
Introduction of Annual Tax on Enveloped Dwellings (ATED)
In 2013, the UK introduced ATED, an annual tax on high-value residential properties held in corporate "envelopes", typically offshore companies. Originally capturing properties with a minimum market value of £2 million, the threshold for ATED has decreased over the years, bringing more properties within its scope. It now applies to all residential properties worth more than £500,000 held in corporate envelopes. Notably, relief from ATED may be available in some circumstances, for example where the enveloped properties are rented out commercially to third parties as part of a genuine property rental business.
When it was originally introduced, many HNWIs retained their structures and accepted the charge as 'quid pro quo' for the very valuable UK inheritance tax advantages that they continued to derive.
Capital gains tax on disposals by non-residents of UK properties
Historically, non-UK residents were outside the scope of UK capital gains tax (CGT) on disposals (including both sales or gifts) of UK property. However, since April 2015, anyone selling or transferring ownership of a UK residential property is now obliged to pay CGT on any increase in its value from 6 April 2015 regardless of their UK tax residence status, unless reliefs such as Principal Private Residence Relief applies.
Moreover, this charge cannot be avoided by selling shares in a company which holds UK property, as there are now rules in place which will subject the sale of shares in a "property rich" company – broadly, a company which derives at least 75% of its value from UK property – to UK CGT.
Whilst in many ways these CGT changes represented a seismic shift in the territoriality of UK tax, the rebasing to 6 April 2015 and the retention of the inheritance tax advantages meant many HNWIs were content to continue to maintain their offshore structures for now.
Stamp Duty Land Tax (SDLT) and surcharges
Subsequent tax changes included a 3% surcharge on the Stamp Duty Land Tax (SDLT) for those owning residential property worldwide and an additional 2% SDLT surcharge for non-resident purchasers. These new rules significantly increased tax liabilities for foreign investors, particularly those purchasing properties valued at £3 million or more.
The final nail in the coffin for offshore structures holding UK residential property came in 2017 – legislation was introduced to preclude the use of non-UK holding structures to shelter UK residential property from inheritance tax (IHT), even where the relevant owner is non-UK domiciled. Anti-avoidance provisions now apply such that the shares in non-UK companies which own UK property (along with any loans used to buy, enhance or maintain the property) would be treated as UK assets for IHT purposes.
Accordingly, there is no longer any advantage from an IHT perspective to hold UK property in an offshore company, and doing so may even result in a higher UK tax exposure (e.g. if ATED applies). Moreover, the use of ownership structures involving an offshore trust with an underlying company that tended to be favoured in the past now carries significant ongoing IHT charges on each 10-year anniversary of the trust, with a further "exit" charge where the UK property is distributed out to a beneficiary of the trust. In essence, the current UK tax regime seeks to encourage direct ownership of UK residential property rather than through a company or a trust.
Transparency Measures and Beneficial Ownership Registers
However, the tax cost of de-enveloping put off a lot of HNWIs from taking any action in this regard. Therefore, the UK (London in particular) continued to have many thousands of super prime UK residential property held opaquely by offshore holding companies. To seek to find out the ultimate beneficial owners of these offshore entities, the UK has implemented various transparency measures, requiring offshore companies to disclose their beneficial ownership information. Corporate structures, once favoured by HNWI owners for confidentiality, now require registration of ultimate beneficial ownership on the UK's publicly accessible Register of Overseas Entities (ROE), thus increasing scrutiny and reducing opportunities for managing legitimate privacy concerns.
Additionally, individuals holding properties through a trust may also be required to be registered as beneficial owners on HMRC's Trust Registration Service (TRS). Although the registration requirement is a once off event, both the ROE and TRS must be periodically updated to ensure that the information on the registers is up to date. Failure to comply with these requirements could result in civil penalties and, in the case of the ROE, criminal penalties.
Case Study: Mr Zhang
Let's examine the case of Mr. Zhang, a high net worth individual from Singapore who owns a luxury London penthouse worth £25 million through an offshore company. Mr Zhang and his family use the penthouse as their holiday home when visiting the UK. Before the changes, Mr. Zhang enjoyed several tax advantages including: no ATED obligations, no IHT exposure on the value of the property, and no CGT on its disposal. However, as the tax landscape shifted, he faced the burden of ATED reporting and payment obligations (currently £269,450 based on the 2023/24 rates), IHT exposure at 40% of the value of the property (£9,870,000 taking into account his nil rate band), and the additional costs and administrative burden of complying with the ROE.
Mr Zhang decided to extract the penthouse from the company – a process also known as de-enveloping – in order to hold it in his personal name. This was the best option for Mr Zhang as he (along with his family members) could freely use the property whilst in the UK without having to pay significant ATED charges or deal with any registration obligations.
Had Mr Zhang wanted to continue owning the penthouse as part of a property rental business, he might have been better off establishing a UK based entity to hold the property, as the rental income generated would be subject to tax at corporate rates (up to 25%) instead of personal income tax rates (up to 45%). Additionally, the ROE registration requirement would not apply on the basis that this the corporate owner is a UK entity (although the UK company would be required to publicly report its Persons With Significant Control).
It should be clear from the above that the legislative landscape in respect of UK residential property has changed enormously over the last 10 years. Although not usually an issue at the forefront of buyers' minds, HNWIs wishing to invest in UK properties should seek tax and structuring advice at the outset of any transaction to ensure that they complete the purchase through the optimum ownership structure for them, based on their objectives and circumstances. As the case study of Mr Zhang illustrates, there is no longer a "one size fits all" solution for HNWIs wishing to invest in UK real estate. Instead, the best holding structure now depends on a number of factors, including the intended use of the property.