Should my UK residential property be held in a company?

What changes has HMRC made?

2012 – Stamp Duty Land Tax (SDLT)

HMRC’s first attempt to discourage indirect ownership of UK residential property was the introduction of a higher SDLT charge for corporate bodies, including companies, of 15%. The higher charge currently applies to property with a value at more than £500,000 (reduced from £2million).

There are exemptions available, including property rental businesses. However, in this case the higher SDLT rates will usually apply, adding 3% to the standard rates that would otherwise only apply to individuals purchasing a second property.

As of April 2021, an additional 2% surcharge applies if the purchaser is non-UK resident, although this is the case for individuals and companies alike. It does, however, allow the potential SDLT rate for companies to reach 17%.

2013 – Annual Tax on Enveloped Dwellings (ATED)

Arguably the most notable change was the introduction of ATED charges from 2013. This is an annual charge imposed on companies holding high-value UK residential property.

In the past, ‘high value’ meant properties worth more than £2million. However, following multiple revisions, the charge now applies to properties valued at more than £500,000, with the charge ranging from £4,150 - £269,450, depending on which bracket the property value falls into. Properties valued at over £20million will attract the highest charge.

There are exemptions to the ATED charge. The most common is when the property is let on a commercial basis. In this case, a relief declaration/ATED return is still required each year.

2017 - Inheritance Tax (IHT) 

Historically, one of the main drivers for holding UK property within a company was the IHT advantages for certain individuals. Previously, UK property held in a non-UK company was not considered a UK asset for UK IHT, which offered attractive tax planning opportunities for non-UK resident or non-domiciled individuals. This changed in 2017, when virtually all UK residential property was brought within the scope of IHT, including those held in offshore companies. Certain loans used to finance the purchase of UK residential property were also brought into the scope of IHT. 

2015 and 2019 – Capital Gains Tax (CGT) for non-UK owners

In 2015, HMRC introduced a new CGT regime for non-UK residents (including companies), charging CGT on direct disposals of UK residential property. At this stage, although an offshore company itself was subject to CGT on disposals of UK residential property, a non-resident company shareholder was not personally liable to UK CGT. 

From 2019, CGT ceased to apply to companies, with the gains being subject to Corporation Tax instead. However, in another effort to deter the use of corporate structures, HMRC also extended the scope of CGT to cover shares in ‘property-rich’ companies. This covers indirect disposals of ‘UK property or land’, which broadly speaking, refers to a 25% or greater interest in a company that derives at least 75% of its gross asset value from UK property. 

To summarise, currently CGT is usually payable on any gains arising to individuals disposing of UK property, or shares in a property rich holding company, irrelevant of their residence position. In both cases, a CGT return must usually be filed with HMRC and any CGT paid within 60 days of completion.

2022 – Register of Overseas Entities

A point relevant to non-UK property holding companies, is the requirement to register with Companies House and declare the company’s beneficial owners/managing officers. The register came into force in 2022, with a deadline to register of 31 January 2023. This was yet another administrative burden for corporate structures, increasing professional fees and also introducing the potential for hefty fines for late registration.

2023 - Corporation Tax rates

From April 2020, companies had the upper hand with lower tax rates charged on any rental income. The Corporation Tax rate was 19%, which was slightly lower than the basic rate of tax for individuals (20%), and much lower than the higher and additional tax rates (40% and 45%). 

From 1 April 2023, the 19% rate applies to companies with profits of £50,000 or less only, provided they are not a Close Investment Holding Company, which many companies holding only residential properties are. There is then a gradual increase to the tax rate depending on profit levels, up to a maximum of 25% for companies with profits exceeding £250,000. 

In summary, Corporation Tax rates are still likely to be lower overall. However, the key thing to note is the possibility of ‘double tax’ if you need to take profits out of the company to live off, as it will also be taxable income for the individual, usually as dividends (at a rate of up to 39.35%). If on the other hand, you do not require the rental income and can leave it to build up in the company, there is more flexibility for tax-efficient extractions.

Is it all bad news?

The answer is no, which is why there is no simple solution to the question of how best to structure ownership of a UK residential property. One of key reasons a corporate route may still be appealing is the mortgage relief restrictions introduced for individuals in 2017, which seems to be one of the only recent HMRC changes in the favour of corporate structures for residential property. 

Which arrangement is best?

It’s not possible to conclude on the most tax-efficient arrangement to hold each and every UK property, as the right solution will depend on the specific circumstances. The above is merely an overview of a decade of changes introduced.

What is clear, however, is HMRC’s efforts have been focused on discouraging the use of corporate structures for residential property. Very broadly, our takeaways are:

• For privately used residential property, little benefit remains within a corporate envelope. The historical IHT/CGT advantages cannot be achieved today. 
• For rental property, some tax efficiencies may still be achieved for higher or additional rate taxpayers who are able to leave the rental income to roll up within the company. For example, someone with a large portfolio of rental properties may be more likely to see noticeable tax savings.
• Otherwise, if funds will need to be taken from the company, the lower Corporation Tax rates and additional mortgage interest relief will need to be weighed up against the potential ‘double tax’ charge and additional administrative fees of running a company.

What are my options?

If your property is already held within a corporate structure, following the legislative changes introduced and highlighted above, it would be sensible to review whether the current structure is working as it was first intended to and that all filing obligations are being met. In some cases, it may be more appropriate to unwind the existing structure, known as ‘de-enveloping’ the property.

If you’re in the initial stages of purchasing a UK residential property and are considering the opportunities available to maximise your position, we would urge you to review your position in detail before introducing a corporate structure, to check it's the right option for you. 

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