This article continues our series for US resident individuals moving to, or considering a move to, the UK. Here, we look at some of the key UK tax considerations for US persons acquiring a residential property in the UK for personal use.

Tax on acquisition

Stamp Duty Land Tax, or SDLT, applies to any purchaser of UK real estate, and is calculated by reference to the purchase price. For residential properties, the rates of SDLT are increased by 2% for non-UK resident purchasers, and by an additional 3% for any purchaser who owns another residential property anywhere in the world.

Therefore, for a US person acquiring a UK home (who owns another home and will not be UK resident), the standard rates of SDLT are increased by 5%. The current rates of SDLT are shown in the table below:

A purchaser will be required to pay the 2% surcharge that applies to non-UK residents if they are not present in the UK for 183 days or more in the 12 months prior to completion of the acquisition. However, if the purchaser spends 183 days or more in the UK in any 12-month period in the 364 days before and 365 days after completion of the acquisition, they are considered UK resident for SDLT purposes and can reclaim the 2% surcharge from HMRC.

Tax on disposal

Since 2019 all UK real estate (both residential and commercial) has been within the scope of UK capital gains tax (CGT) for non-UK residents as well as UK residents. 

On a disposal of a UK residential property by a US person, any capital gain realised on the property will in principle be taxable in the UK, at either 18% or 28% at current rates, depending on the individual's other taxable income and capital gains in the relevant year. However, full relief from CGT may be available if the owner uses the property as their main residence. Note that main residence relief can only apply in the UK if the owner is UK resident, or (if non-UK resident) spends at least 90 days in the property in each tax year. Care is needed here, as spending 90 days or more in the UK in a tax year may have an impact on the person's tax residence position more generally.

If it applies, main residence relief can offer a significant UK tax saving. There is a significant difference here with the position in the US, where the maximum relief from tax on the disposal of a main home is $500,000 (for a couple filing joint returns, where certain conditions for the relief are satisfied). In the UK, the relief can apply to the whole gain. Given the worldwide taxation of US persons, any capital gains realised on the disposal of a UK property would also in principle be taxable in the US. The US/UK double tax treaty would generally assist in relieving any double tax that the individual suffers on the same capital gain.

Succession

Since 2017 all UK residential property has been within the scope of UK inheritance tax (IHT), however owned (i.e. whether owned directly, or indirectly through any corporate structure or trust). Therefore, the value of any such property owned by a US person would be fully within the scope of IHT. 

Note that, as US persons are subject to worldwide taxation, the value of any UK residential property would also be within the scope of US estate tax. The US/UK estate tax treaty would generally assist in relieving any double tax that the individual's estate suffers in the event that they die while owning the property. Depending on the personal tax positions of the individual and their spouse (if any), it may be possible to benefit – on the death of the first spouse – from a spouse exemption for UK IHT as well as the marital deduction for US estate tax. This can achieve a deferral of any UK IHT or US estate tax until the death of the second spouse, when the property is transferred to the next generation or sold. 

Depending on the age of the owner(s), life insurance can be a simple (and often cost effective) way to mitigate any IHT exposure.

Personal or corporate ownership

Generally, for UK properties acquired for personal use, it is preferable to own the property personally rather than through a corporate vehicle. The downsides to corporate ownership in this scenario are the rate of SDLT on acquisition (which is increased to a flat 17% on the whole purchase price for acquisitions above £500,000), and the application of the annual tax on enveloped dwellings (or ATED), which has applied since 2013 to UK residential properties worth over £500,000 owned by companies, subject to certain reliefs. Also, for US persons, personal ownership should avoid any potential issues under the "controlled foreign corporation" or "passive foreign investment company" rules in the US.

One scenario where corporate ownership may be preferable is if the owner intends to let the property out on a commercial basis. In this case, the flat 17% rate of SDLT would not apply on acquisition, and full relief from ATED would in principle be available. In addition, one advantage of corporate ownership in this scenario is that the rate of tax applicable to the rental income would be lower (i.e. instead of income tax at rates up to 45%, corporation tax would apply at 19%, or potentially 25% from April 2023). The rental income could therefore roll-up at a lower rate of tax in the company, albeit that the extraction of profits from the company would generally trigger a further tax charge.

Conclusion

For US persons acquiring a property for personal use, it will likely be preferable for this to be purchased in the person's own name (rather than through a company). The main tax points to consider are: SDLT in the UK on acquisition, tax on capital gains in the UK and US on disposal (subject to main residence reliefs), and UK inheritance tax/US estate tax on death (or gift).

Are you looking to invest in the UK? Our market-leading Private Wealth practice can assist with all aspects of a UK property purchase, as well as a move to the UK. Please contact us for further information and advice.