Getting in touch Non-residents investing in UK commercial ...

1 Non-residents investing in UK commercial propertyImportant tax considerationsGetting in touchWhen you need a practical legal solution foryour next business opportunity or challenge,please get in House, London BridgeLondon EC4R 9HA EnglandElizabeth BradleyTel: +44 (0)20 3400 HarbotTel: +44 (0)20 3400 Kong11/F50 Connaught RoadCentral Central, Hong KongVictoria GardnerTel: +852 3143 Raffles Place#24-01 Republic PlazaSingapore 048619 Nisha SinghTel: +65 6571 BLPB erwin Leighton Paisner is an award-winning,international law firm. Our clients include over 50 Global Fortune 500 or FTSE 100 global footprint of 11 offices has deliveredmore than 650 major cross-border projects inrecent years, involving up to 48 separatejurisdictions in a single Firm has won five Law Firm of the Year titles, isindependently ranked by Chambers and the Legal500 in over 65 legal disciplines and the FT currentlyranks us in the top 10 law firm innovators in commercial Construction Corporate Finance Dispute Resolution Employment, Pensions and Incentives Energy and Natural Resources EU & Competition Finance Funds and Financial Services Insurance Intellectual property Private Client Projects Real Estate Regulatory and Compliance Restructuring and Insolvency TaxThis briefing is a general summary only.

2 It is not legal advice should be sought in relation to the particularfacts of a given situation. If you want to unsubscribe please sendan email to with unsubscribe newsletter in the title and you will be and work in 130 countries, delivered via offices in:Abu Dhabi, Beijing, Berlin, Brussels, Dubai, Frankfurt, Hong Kong, London, Moscow, Paris and SingaporeA complete, hands-onlegal service for allreal estate needs02/ Non-residents investing in UK real estateNon-residents investing in UK real estate /03 This note is a generalguide to some of the mainUK tax considerations fora non-UK resident lookingto acquire UK commercialreal estate as aninvestment, based on thelaw as at April advice on thefacts should be sought toconfirm the precise UK taximplications and ensurethe right particular, where thereal estate includesresidential property , extraUK tax rules need to BradleyPartnerRichard HarbotPartnerTypical non-residentstructureA non-UK company is historicallya popular vehicle for non-UKresidents to hold UK commercialreal estate, as it offers thefollowing advantages.

3 Rent taxed at 20%Non-UK tax resident companiesholding property as an investmentpay tax at 20% on the net rentalincome. This rate does not dependupon a tax treaty, so it appliesirrespective of where the non-UKcompany is resident . The UKoperates a system for withholdingthis 20% tax from the rent before itis paid to Non-residents . However,it is possible to obtain a priorclearance from the UK taxauthorities for rent to be paid gross, with no witholding, pendingeventual settlement of theappropriate tax due at the taxpayment point (31 January in theyear after 5 April).Generous deductions forinterest expensesThe UK has generous rules thatallow the amount of rent that istaxed to be reduced by the interestpaid on third party finance taken outto acquire UK real estate. Intereston shareholder debt may also bedeductible, subject to the UKtransfer pricing rules.

4 The UKgenerally withholds 20% tax frominterest paid to Non-residents ,though this will depend on theprecise structure of the debt and/ orany available tax treaty UK tax on gains wheninvestment property soldNon-UK residents holding UKcommercial real estate as aninvestment are not generallysubject to UK capital gains , any gain realised whena non-UK company sells UK realestate should not be taxed in theUK. The non-UK company can alsogenerally be sold without triggeringUK tax on the gain, or any UKtransfer allowances availableNon-UK residents can claim capitalallowances, which will reduce theamount of rent that is subject to UKtax. Capital allowances are a formof depreciation allowance on plantand machinery, and can be veryvaluable. Broadly, if available, theycan be claimed on a reducingbalance basis at either 8% or 18%,depending upon the type of plantand machinery.

5 They are availableto a purchaser of Real Estatewhere part of the purchase price isattributable to plant and transfer taxesStamp duty land tax (SDLT) ispayable by the purchaser of UKcommercial real estate generally ata rate of 4% (or more if high valueresidential) of the purchase price ,plus VAT (if any). The sale ofshares in a non-UK company thatowns UK commercial real estate isnot generally subject to SDLT orany other UK transfer unit trust vehiclesare particularly attractive toUK tax exempt investorsbecause they can receivethe rent tax things to bearin mindThe acquisition of UK real estatecan be complex and there are anumber of issues that need to becarefully considered and plannedaround to reduce exposure to UKtax and ensure that the structure ispractical to run on a day-to-daybasis. Below are just some of theother more significant issues thatneed to be considered (in additionto the points above) whenacquiring UK real estate.

6 Asalways, it is vital to get appropriateprofessional offshore entity must bemanaged and controlled outsidethe UK to maintain non-UK taxresident status. In the case of acompany, this generally requiresthat a majority of the directors (orequivalents) are non-UK taxresident and that all boardmeetings are held outside the vs tradingThe tax treatment outlined aboveassumes that the non-UK residentcompany will own the UK realestate as an investment. If it isdeveloping or trading in UK realestate, then the profits may betaxed differently. The distinctionbetween trading and investment isimportant if a non-UK residentcompany is treated as trading inUK property , it may becomesubject to either UK corporation taxat 20% on all of its profits from thattrade carried on in the UK,including any gain on the disposalor potentially UK Diverted Profitstax at 25%.

7 This can be a particular issue if thereal estate is sold soon afteracquisition or structuring may bepossible if trading is intended. Non-UK developers also need to watchout for anti-avoidance legislation,which can bring gains into thecharge to UK Added Tax (VAT)VAT will usually be chargeable onthe acquisition of UK commercialreal estate. The current rate of VATis 20%. If the property is let, then asale may be treated as a transfer ofa going concern, provided certainconditions are met. In that situationno VAT will be payable, reducingfunding costs and , VAT is usually charged onthe rents paid by commercialtenants. Owners of UK commercialreal estate do not automaticallyhave to charge VAT on the rents orsale price; it depends upon whetherthey have opted to charge , if a landlord does not optto tax in this way, it will notgenerally be able to recover any ofthe VAT it pays when acquiring,maintaining or refurbishing theproperty, and that VAT will becomean absolute cost.

8 It is generally onlyworth a landlord not opting to tax ifit can charge more rent as a resultand the extra rent makes up for anylost VAT. Different VAT rules applyto property for residential orcharitable use. Specific adviceshould be obtained on the factswhere unit trustsMany investors in UK real estatestructure their holdings via anoffshore property unit trust. Themain difference between anoffshore unit trust and a non-UKcompany is that the unit trust isgenerally treated as transparent forUK income tax purposes. Theinvestors in the unit trust will,therefore, be taxed as if theyreceived their share of the rentsdirectly. These vehicles areparticularly attractive to UK taxexempt investors because they canreceive the rent tax free. Suchinvestors prefer not to hold UK realestate via a non-UK companybecause they cannot reclaim the20% tax it pays on the diligenceWhere an interest in UK real estateis acquired indirectly (via shares orunits in a separate vehicle) there isalways a risk that the vehicle haspre-existing tax or other due diligence shouldbe carried out so that any risks canbe identified and quantified andaccounted for in the transaction.