Property in the UK, especially in key financial centres such as London, has always been very popular with overseas investors. However, when non-residents invest in property, the way in which their purchases are structured, especially when it comes to tax rules, can have an effect on their return.

Non-resident companies:
All non-resident companies which have a permanent establishment in the UK are subject to UK corporation tax on their trading income. For property companies this usually arises in development or land dealing transactions. However, in certain circumstances, Tax Treaties which the UK has with other countries, will offer some protection against a charge.

As a rule, income from all UK properties is treated as a single source of business income, and all profits and losses are pooled together. For standalone companies, losses must initially be set against other profits in the latest financial year (and then carried forward against future income). 

If a non-resident company is not trading in the UK through a permanent establishment, but still has investment property, then it will be subject to income tax on its UK properties at the basic 20% rate of income tax.

Unlike most EU countries, a non-resident company which realises a capital gain on UK investment property will find they are generally not taxable unless they are attributable to a trade being carried out in the UK through a branch or agency.

Non-resident Individuals:
All lettings in the UK by a non-resident individual are treated as a single business with the annual profit or loss computed on normal business accounting principles.

The income is based on the annual profits generated by the rent as well as part of the premium on the grant of a short lease (normally less than 50 years), with allowable expenses similar to those claimed by the companies.  However, unlike companies, their liability is not just limited to the basic rate of tax.

What’s more, non-resident individuals generally avoid capital gains on the sale of an investment property. However, capital allowances are not allowed on furniture used in a residential dwelling. Instead, an application can be made for either relief on a renewal basis or a ‘wear and tear allowance’.

Whilst the rules have certainly tightened up in recent years in the UK, in comparison with most European countries, it is quite safe to say that the UK remains a tax haven for property investors. But, there is still a fine line between property income deemed as an investment and that deemed as trading, which is why, before doing anything, it is essential to obtain professional advice.

Stacy Eden is the partner in charge of property and construction at Mazars, one of Europe’s largest accountancy firms. As an international advisory firm with strong European roots, Mazars is committed to taking a consistent, high quality, and cost-effective approach. The firm’s property and construction experts can provide practical commercial advice, assess financing options, in addition to giving assistance with tax planning and structuring. To find out how contact Stacy on 0207 063 4347.