Until a few years ago, the general advice for a non-UK resident buying UK residential property was often to buy through a non-UK company. A key benefit was that it would provide a shelter from inheritance tax (IHT).
Non-domiciliaries only pay IHT on UK assets and if the property was held by a company, the shares of the company – which were outside the UK – would be outside the scope of IHT if the individual made any lifetime gifts or died still owning the shares.
The advantages of corporate ownership started to be eroded from April 2013, with the introduction of the annual tax on enveloped dwellings, or ‘ATED’ (the term ‘enveloped’ broadly means held by a company, whether in the UK or outside the UK, though there are a few other types of ‘envelope’).
The amount of ATED payable depends on the value of the property. The rate for April 2018/19 is £3,600 for properties worth over £500,000 – £1m, and for properties of between £1m – £2m, it is £7,250.
Despite ATED, many non-domiciliaries still considered it worth retaining the holding company because of the IHT benefit it offered. Then, with effect from April 2017, the rules changed on that, too. Broadly, the company is now looked at for IHT purposes, so the value of the property is brought within the scope of IHT.
From that time, holding a residential property in the UK through a company became more expensive in most cases than holding it directly. Many individuals who were still holding residential properties through companies have now transferred the property into their own name (a process which can itself have UK tax consequences). This also saves fees on running the company.
Of course UK tax is only one consideration. People may have practical reasons, succession planning reasons, or taxes of other jurisdictions to take into account. However, given the expenses of corporate ownership, most people now opt to hold a residential property directly, at least if they are going to live there.
ATED does not apply where the property is rented out commercially. In this case, we still see companies holding residential properties that are rented out.
BDB Pitmans is a multi-disciplinary UK law firm advising private companies, public sector bodies, not-for-profit organisations and individuals since 1834. Visit bdbpitmans.com to find out more